Abstract

We examine the relation between borrowing costs and the presence of loan collateral. We find the presence of collateral increases with default risk, consistent with low quality borrowers reducing their risks and borrowing costs through the use of collateral. By explicitly controlling for the interdependence between the decision to pledge collateral and borrowing costs, we find that secured loans have predicted spreads substantially lower than if they had been made on an unsecured basis. Alternatively, loans made on an unsecured basis have spreads not substantially different from if they had been secured. The evidence suggests that collateral pledging decisions are generally consistent with borrowing cost minimization.

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Additional Information

ISSN
1538-4616
Print ISSN
0022-2879
Pages
pp. 67-90
Launched on MUSE
2006-04-24
Open Access
No
Archive Status
Archived 2007
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