Uncovering Collateral Constraints

Collateral plays two roles. It may be used as an ex-ante commitment mechanism against agency risk or for hedging expected default risk. Using cross-country loan level data, we find that the commitment motive alone explains collateralization. Going from the lowest to highest quartile of ex-ante agency risk distribution increases initial collateralization by 11 percentage points, controlling for the supply of collateral, but the same change in default risk leads to no change in collateralization. We also uncover a collateral “pecking order” driven solely by commitment concerns. While the bank is willing to accept firm-specific assets susceptible to agency risk for low agency risk firms, it prefers non-specific assets for firms prone to agency risk. We find that information environments with institutions such as credit registries and objective rating criteria increase rating precision, and show that our results are not a consequence of rating imprecision.