How Do Laws and Institutions affect Recovery Rates on Collateral?

Degryse, Hans and Ioannidou, Vasso and Liberti, Jose and Sturgess, Jason (2020) How Do Laws and Institutions affect Recovery Rates on Collateral? Review of Corporate Finance Studies, 9 (1). pp. 1-43.

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Abstract

We show that laws and institutions that strengthen creditor protection increase expected recovery rates on collateral using unique internal bank data on ex-ante appraised liquidation and market values of assets pledged as collateral in 16 countries. Stronger creditor protection increases expected recovery rates on movable collateral relative to immovable collateral and shifts the composition of collateral towards movable assets, which increases debt capacity through both higher loan-to-values and attenuating the creditor’s liquidation bias. Our results suggest that the recovery rate on collateral is an important first-stage mechanism through which creditor protection can improve contracting efficiency and enhance access to credit.