How Do Laws and Institutions affect Recovery Rates on Collateral?

54 Pages Posted: 28 May 2019

See all articles by Hans Degryse

Hans Degryse

KU Leuven - Faculty of Business and Economics (FEB)

Vasso Ioannidou

Centre for Economic Policy Research (CEPR); The Business School (formerly Cass)

Jose Maria Liberti

Northwestern University - Kellogg School of Management; DePaul University

Jason Sturgess

Queen Mary University of London

Date Written: April 22, 2019

Abstract

We show that laws and institutions that strengthen creditor protection increase expected recovery rates on collateral using unique internal bank data on ex-ante appraised liquidation values and market values of assets pledged as collateral from secured loans in 16 countries. Stronger creditor protection increases expected recovery rates on movable collateral relative to immovable collateral and shifts the composition of collateral towards movable assets, which increases debt capacity through both higher loan-to-values and attenuating the creditor’s liquidation bias. Our results provide novel evidence confirming key assumptions and predictions of the financial contracting literature and shows that the recovery rate on collateral is an important first-stage mechanism through which creditor protection can improve contracting efficiency and enhance debt capacity and terms of credit.

Keywords: collateral, creditor rights, liquidation values, recovery rates

JEL Classification: K4; G2; G33

Suggested Citation

Degryse, Hans and Ioannidou, Vasso and Ioannidou, Vasso and Liberti, Jose Maria and Sturgess, Jason, How Do Laws and Institutions affect Recovery Rates on Collateral? (April 22, 2019). Available at SSRN: https://ssrn.com/abstract=3380957 or http://dx.doi.org/10.2139/ssrn.3380957

Hans Degryse

KU Leuven - Faculty of Business and Economics (FEB) ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

Vasso Ioannidou (Contact Author)

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

The Business School (formerly Cass) ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

Jose Maria Liberti

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Jacobs 4203
Evanston, IL 60208
United States
(847) 491-5861 (Phone)
(847) 491-5719 (Fax)

HOME PAGE: http://www.kellogg.northwestern.edu/faculty/directory/liberti_jose.aspx

DePaul University ( email )

1 East Jackson Blvd.
Chicago, IL 60604-2287
United States
(312) 362-8739 (Phone)
(312) 362-6566 (Fax)

Jason Sturgess

Queen Mary University of London ( email )

Mile End Road
London, London E1 4NS
United Kingdom

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