Collateral and Yield Spread of Syndicated Loans

Khaled Amira, Mark L. Muzere

Abstract


We examine factors that influence the use of collateral in syndicated loans and explore debt contract theories under adverse selection and moral hazard. Using a probit model (Agresti, 2007) to analyse syndicated loan data (1987-2007) for firms in the United States, we find that loan and borrower specific factors and general economic conditions as well are significant in explaining the presence of collateral in these loans. Further testing exploring the relationship between collateral and yield spread of syndicated loans while using an econometric procedure (Heckman, 1976; Lee, 1978) to control for the simultaneity between the decision to use collateral and the determination of the yield spread confirms the empirical predictions of the moral hazard debt theory. The use of collateral reduces risk and the cost of borrowing for syndicated loans, providing further clarification to the mixed empirical evidence in the literature.


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DOI: https://doi.org/10.5430/afr.v7n3p180

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Accounting and Finance Research
ISSN 1927-5986 (Print)   ISSN 1927-5994 (Online)

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