A key driver for the mixed relationship between loan risk premiums and collateral: Evidence from China |
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| Institution: | 1. College of Economics and Management, Nanjing University of Aeronautics and Astronautics, China;2. Business School and International Research Centre for Sustainable Finance, Ningbo University, China;3. School of Economics, University of Nottingham Ningbo, China;4. Chinese Academy of Finance and Development, Central University of Finance and Economics, China;1. Department of Mathematics and School of Economics and Management, University of Bologna, Bologna, Italy;2. Department of Economics, Society and Politics, University of Urbino Carlo Bo, Italy;3. Department of Economics, University of Bamberg, Germany;1. School of Finance, Xinjiang University of Finance and Economics, 449 Middle Beijing Road, Urumqi 830012, PR China;2. Belt & Road Finance Institute, Central University of Finance and Economics, 39 South College Road, Haidian District, Beijing 100081, PR China;3. International Business College, South China Normal University, 55 Zhongshan Road, Tianhe District, Guangzhou 510631, PR China;1. School of Accounting, Zhongnan University of Economics and Law, 182 Nanhu Avenue, Wuhan, China;3. School of Accountancy, Shanghai University of Finance and Economics, 777 Guoding Road, Shanghai, China;4. Research Center of Finance, Shanghai Business School, 123 Fengpu Avenue, Shanghai, China;1. Adam Smith Business School, University of Glasgow, Glasgow G12 8QQ, UK;2. University of Essex, Colchester CO4 3SQ, UK;3. College of Economics and Management, Nanjing University of Aeronautics and Astronautics, Nanjing 211106, China |
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| Abstract: | In spite of both ex-ante adverse selection and ex-post moral hazard theories supporting this mixed observable relationship between loan risk premiums and collateral, any plausible explanation for this mixed result still remains conspicuously absent in the literature. Based on a novel Chinese bank loan dataset, we show that collateral is negatively correlated with loan risk premiums, which is consistent with the ex-ante theory. However, after controlling for the purpose of the loan, mixed relationships between collateral and loan risk premiums for different types of collateral are obtained. The specific loan purpose plays an important role in determining loan risk premiums. We demonstrate that the mixed empirical results found in the existing literature to date may result from different economic characteristics of both collateral type and loan purpose, wherein particular liquidity may be of first-order importance in finally helping to demystify the mixed relationships. |
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