Cross-ownership and collateral in lending

Xuesong Qian; Zifang Ding; Xiaping Cao; Shusen Qi

doi:10.1016/j.irfa.2020.101572

Cross-ownership and collateral in lending

Xuesong Qian, Zifang Ding, Xiaping Cao, Shusen Qi^*

^*Corresponding author for this work

International Business School Suzhou

Research output: Contribution to journal › Article › peer-review

4 Citations (Scopus)

Abstract

Information asymmetry is a major obstacle in both formal and informal loan markets. However, when a borrower and a lender are connected via cross-ownership, this obstacle can be significantly reduced. Cross-ownership enables lenders to collect more concrete and precise information about borrowers, and this lowered information asymmetry reduces the likelihood that the lender will require the borrower to provide collateral. Using a data set of 1091 intercorporate loans from China, we find strong support for the prediction that cross-ownership between lenders and borrowers lowers the collateral requirements by more than 50%. This relation is more pronounced for informationally opaque borrowers and for lending firms with a controlling stake in the borrowing firms.

Original language	English
Article number	101572
Journal	International Review of Financial Analysis
Volume	72
DOIs	https://doi.org/10.1016/j.irfa.2020.101572
Publication status	Published - Nov 2020

Keywords

Collateral
Cross-ownership
Information asymmetry
Intercorporate loans

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10.1016/j.irfa.2020.101572

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title = "Cross-ownership and collateral in lending",

abstract = "Information asymmetry is a major obstacle in both formal and informal loan markets. However, when a borrower and a lender are connected via cross-ownership, this obstacle can be significantly reduced. Cross-ownership enables lenders to collect more concrete and precise information about borrowers, and this lowered information asymmetry reduces the likelihood that the lender will require the borrower to provide collateral. Using a data set of 1091 intercorporate loans from China, we find strong support for the prediction that cross-ownership between lenders and borrowers lowers the collateral requirements by more than 50%. This relation is more pronounced for informationally opaque borrowers and for lending firms with a controlling stake in the borrowing firms.",

keywords = "Collateral, Cross-ownership, Information asymmetry, Intercorporate loans",

author = "Xuesong Qian and Zifang Ding and Xiaping Cao and Shusen Qi",

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year = "2020",

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doi = "10.1016/j.irfa.2020.101572",

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AU - Qian, Xuesong

AU - Ding, Zifang

AU - Cao, Xiaping

AU - Qi, Shusen

PY - 2020/11

Y1 - 2020/11

N2 - Information asymmetry is a major obstacle in both formal and informal loan markets. However, when a borrower and a lender are connected via cross-ownership, this obstacle can be significantly reduced. Cross-ownership enables lenders to collect more concrete and precise information about borrowers, and this lowered information asymmetry reduces the likelihood that the lender will require the borrower to provide collateral. Using a data set of 1091 intercorporate loans from China, we find strong support for the prediction that cross-ownership between lenders and borrowers lowers the collateral requirements by more than 50%. This relation is more pronounced for informationally opaque borrowers and for lending firms with a controlling stake in the borrowing firms.

AB - Information asymmetry is a major obstacle in both formal and informal loan markets. However, when a borrower and a lender are connected via cross-ownership, this obstacle can be significantly reduced. Cross-ownership enables lenders to collect more concrete and precise information about borrowers, and this lowered information asymmetry reduces the likelihood that the lender will require the borrower to provide collateral. Using a data set of 1091 intercorporate loans from China, we find strong support for the prediction that cross-ownership between lenders and borrowers lowers the collateral requirements by more than 50%. This relation is more pronounced for informationally opaque borrowers and for lending firms with a controlling stake in the borrowing firms.

KW - Collateral

KW - Cross-ownership

KW - Information asymmetry

KW - Intercorporate loans

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Cross-ownership and collateral in lending

Abstract

Keywords

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