Uncovering Collateral Constraints

José María Liberti, DePaul University

Abstract

Collateral may be used as commitment against ex-ante agency risk, or for hedging against ex-post realized risk. Using a panel data of 12,000 small and medium firms in 17 countries with direct measures of ex-ante agency risk and ex-post realized default, we find that the commitment motive alone explains collateralization. Going from the lowest to highest quintile of ex-ante agency risk distribution increases initial collateralization by 16 percentage points, but the same change in ex-post realized default leads to no change in collateralization. We also uncover a collateral “pecking order” driven by commitment concerns. While the bank is willing to accept firm-specific assets susceptible to agency risk (e.g. plant machinery and inventory) for low agency risk firms, it prefers non-specific assets (e.g. real estate and liquid securities) for firms prone to agency risk.