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

Abstract

The relationship between firms and banks often suffers from informational opacity which may result in credit rationing. In theory, providing collateral to the bank can have a mitigating effect on these informational asymmetries and thus solve the credit rationing problem. The aim of this article is twofold. First, we provide a review of recently growing empirical research on collateral as a remedy for credit rationing. Secondly, we would like to pin-point gaps and limitations in current empirical research. Most studies contend with an incomplete research design by 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 estimation method used and provide suggestions to incorporate interaction effects into the estimation models. Further, we discuss the relevance and need for distinguishing between personal and business collateral which is rarely done. We draw attention to the importance of further exploring the use of collateral since recent trends predict that collateral will become a more important debt contract feature.