Collateral and Bank Credit – a Puzzle

Abstract

The impact of firms characteristics on bank debt financing has always been a field of conflicts among economists (e.g. trade-off theory vs. pecking order theory). The pecking order theory predicts that firms holding more tangible assets are less prone to asymmetric information problems and reduce the agency cost. Generally, the supply of bank loans is expected to be higher for firms with higher collateral. In the empirical literature, this relationship is not always confirmed. We analyse this phenomenon from three points of view: meta-analysis of literature, country level data and case of Poland. This study provides a systematic analysis of the empirical literature on the usage of bank debt by conducting a meta-analysis. In particular, the problem of publication selection bias is discussed. We explore the sources of heterogeneity among studies including moderator variables in random- and fixed effects regressions. Our results indicate that there is an evidence of publication selection. Based on country level data we conclude that the impact of collateral on bank credit is negative. For Polish case we find that the impact of collateral on debt is positive, except for the subsample of large enterprises.