Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/78085
Authors: 
Elsas, Ralf
Krahnen, Jan Pieter
Year of Publication: 
2002
Series/Report no.: 
CFS Working Paper 2002/17
Abstract: 
This paper analyses the role of collateral in loan contracting when companies are financed by multiple bank lenders and relationship lending can be present. We conjecture and empirically validate that relationship lenders, who enjoy an informational advantage over arm's-length banks, are more senior to strengthen their bargaining power in future renegotiation if borrower's face financial distress. This deters costly conflicts between lenders and fosters workout decisions by the best informed party. Consistent with our conjecture, we find that relationship lender in general have a higher probability to be collateralized, and a higher degree of collateralization (i.e. seniority). Furthermore, we show that seniority and the status of relationship lending increases the likelihood that a bank invests in a risky workout of distressed borrowers. Both findings support the view that collateral is a strategic instrument intended to influence the bargaining position of banks. Our result further suggest that seniority and relationship lending are complementary to each other.
Subjects: 
relationship lending
collateral
multiple lending
loan contract design
workouts
JEL: 
G21
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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