Asymmetric Valuations and the Role of Collateral in Loan Agreements

  • Chan Y
  • Kanatas G
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Abstract

Collateral can serve as a source of additional, indirect information in a rational expectations signalling context. The collateral chosen by the borrower provides a signal to the lender of the borrower's info., and in a rational expectations equiilibrium, the signal can be fully revealing. They conclude that it is the lower-quality, small and middle-size firms that provide collateral; in contrast, emphasising the use of collateral as a response to asymmetric valuations between transactors predicts that it is the better-quality firms in these size categories taht offer collateral.

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Authors

  • Yuk-Shee Chan

  • George Kanatas

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