Collateral and credit rationing: a review of recent empirical studies as a guide for future research

Abstract

The relationship between firms and banks often suffers from informational opacity that may result in credit rationing. In theory, providing collateral to the bank can have a mitigating effect on these informational assymetries and thus solve the credit-rationing problem. Even though collateral is already a widespread debt contract feature, recent trends predict that, in the future , collateral will become even more important for informationally opaque firms. The aim of this paper is twofold. First, we provide a review of the recently growing empirical research on collateral as a remedy for credit rationing. Second, we would like to pinpoint gaps and limitations in current empirical research. Most studies contend with a flawed research design by not distinguishing between business and personal collateral and excluding other information opaqueness reducing tools such as the strength of the relationship between borrower and lender, loan maturity and covenants. We also discuss the limitations of using a single equation estimation method and the usefullness of incorporating interaction effects into the estimation models. Finally, we provide suggestions for fruitful research avenues that would fill these gaps and enrich the empirical knowledge in this research domain.