Collateral, relationship lending and family firms

Abstract

Prior research suggested that relationship lending could play a role in solving asymmetric information problems between borrower and lender. Other studies suggest a relationship between family ownership and the shareholder-bondholder agency conflict. The present paper investigates the impact of relationship characteristics, family ownership and their interaction effects upon the use of collateral in SME lending. We examine the determinants of collateral as well as the determinants of the choice between business and personal collateral using decision tree analysis. The results reveal that relationship characteristics have a significant influence but not always in the direction as expected. Moreover, they do not seem to be the primary determinants in our classification models. The most important determinants in both classification models seem to be the loan amount, total assets and the family versus non-family firm distinction. In addition, we differentiate between line-of-credit and nonline-of-credit loans and find significant differences between these decision trees.