The Uniqueness of Short-Term Collateralization
The author finds evidence that lines of credit secured by accounts receivable are associated with business borrowers with a high risk of default. While an unsecured short-term loan is repaid from the borrower's future cash flow, a loan secured...
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| Format: | Policy Research Working Paper |
| Language: | English en_US |
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World Bank, Washington, DC
2013
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| Online Access: | http://documents.worldbank.org/curated/en/2001/02/1000481/uniqueness-short-term-collateralization http://hdl.handle.net/10986/15743 |
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okr-10986-157432021-04-23T14:03:19Z The Uniqueness of Short-Term Collateralization Klapper, Leora SECURED TRANSACTIONS COLLATERAL ASSETS ACCOUNTS RECEIVABLE BORROWING ARRANGEMENTS LETTERS OF CREDIT DEBT CONTRACTS ACCOUNT ACCOUNTING ACCOUNTS ACCOUNTS RECEIVABLE ACCOUNTS RECEIVABLE TURNOVER AGENCY PROBLEMS ASSET VALUE ASYMMETRIC INFORMATION AUDITING BAD DEBT BALANCE SHEET BANKRUPTCY BOOK VALUE BORROWER BORROWING BUSINESS RISK CASH FLOWS CASHFLOW COLLATERALIZATION COMMERCIAL BANKS COMMERCIAL LOANS CREDIT RATIONING CREDIT RISK CURRENT ASSETS DEBT DEPRECIATION DIVIDENDS EMPLOYMENT EXPECTED RETURN EXPECTED VALUE EXPENDITURES EXTERNAL FINANCING FEDERAL RESERVE SYSTEM FINANCIAL RATIOS FINANCIAL RESTRUCTURING FINANCING OPTIONS FIXED ASSETS FIXED COSTS FUTURE CASH FLOW HIGHLY LEVERAGED FIRMS INFORMATION ASYMMETRY INSURANCE INVENTORY INVENTORY TURNOVER LENDER LENDER OF LAST RESORT LENDERS LIQUIDATION LIQUIDATION VALUE LIQUIDITY LOAN LOAN AMOUNT MARKET VALUE MATURITY MORAL HAZARD NPV PRESENT VALUE PRIVATELY HELD COMPANIES PROBABILITY OF DEFAULT PRODUCTIVITY PROFIT MARGIN PROFITABILITY PUBLIC DEBT QUICK RATIO RISK NEUTRAL SALES SELLING SHAREHOLDERS SUBSIDIARIES TANGIBLE ASSETS TRANSACTION COSTS UCC WEALTH WORKING CAPITAL The author finds evidence that lines of credit secured by accounts receivable are associated with business borrowers with a high risk of default. While an unsecured short-term loan is repaid from the borrower's future cash flow, a loan secured by accounts receivable (a unique form of "inside" collateral) is repaid from previously generated and observed sales (the borrower's trade credit terms to its customers). Consequently, lenders that secure accounts receivable are most concerned with the credit risk of the borrower's customers and the borrower's ability to continue to generate new sales. A stylized theoretical model demonstrates that the value of a secured line-of-credit loan in minimizing contracting costs is associated with the borrower's business risk and the quality of the borrower's customers. Empirical tests on a sample of publicly traded U.S. manufacturing firms find that firms with secured line of credit loans are observably riskier and have fewer expected growth opportunities. The author's findings suggest that observably riskier borrowers can borrow more on a secured than on an unsecured basis. The results highlight the important role of secured letters of credit in providing liquidity to risky, credit-constrained firms that might not have access to external financing through other channels. 2013-09-09T20:52:17Z 2013-09-09T20:52:17Z 2001-02 http://documents.worldbank.org/curated/en/2001/02/1000481/uniqueness-short-term-collateralization http://hdl.handle.net/10986/15743 English en_US Policy Research Working Paper;No. 2544 CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo/ World Bank World Bank, Washington, DC Publications & Research :: Policy Research Working Paper Publications & Research |
| repository_type |
Digital Repository |
| institution_category |
Foreign Institution |
| institution |
Digital Repositories |
| building |
World Bank Open Knowledge Repository |
| collection |
World Bank |
| language |
English en_US |
| topic |
SECURED TRANSACTIONS COLLATERAL ASSETS ACCOUNTS RECEIVABLE BORROWING ARRANGEMENTS LETTERS OF CREDIT DEBT CONTRACTS ACCOUNT ACCOUNTING ACCOUNTS ACCOUNTS RECEIVABLE ACCOUNTS RECEIVABLE TURNOVER AGENCY PROBLEMS ASSET VALUE ASYMMETRIC INFORMATION AUDITING BAD DEBT BALANCE SHEET BANKRUPTCY BOOK VALUE BORROWER BORROWING BUSINESS RISK CASH FLOWS CASHFLOW COLLATERALIZATION COMMERCIAL BANKS COMMERCIAL LOANS CREDIT RATIONING CREDIT RISK CURRENT ASSETS DEBT DEPRECIATION DIVIDENDS EMPLOYMENT EXPECTED RETURN EXPECTED VALUE EXPENDITURES EXTERNAL FINANCING FEDERAL RESERVE SYSTEM FINANCIAL RATIOS FINANCIAL RESTRUCTURING FINANCING OPTIONS FIXED ASSETS FIXED COSTS FUTURE CASH FLOW HIGHLY LEVERAGED FIRMS INFORMATION ASYMMETRY INSURANCE INVENTORY INVENTORY TURNOVER LENDER LENDER OF LAST RESORT LENDERS LIQUIDATION LIQUIDATION VALUE LIQUIDITY LOAN LOAN AMOUNT MARKET VALUE MATURITY MORAL HAZARD NPV PRESENT VALUE PRIVATELY HELD COMPANIES PROBABILITY OF DEFAULT PRODUCTIVITY PROFIT MARGIN PROFITABILITY PUBLIC DEBT QUICK RATIO RISK NEUTRAL SALES SELLING SHAREHOLDERS SUBSIDIARIES TANGIBLE ASSETS TRANSACTION COSTS UCC WEALTH WORKING CAPITAL |
| spellingShingle |
SECURED TRANSACTIONS COLLATERAL ASSETS ACCOUNTS RECEIVABLE BORROWING ARRANGEMENTS LETTERS OF CREDIT DEBT CONTRACTS ACCOUNT ACCOUNTING ACCOUNTS ACCOUNTS RECEIVABLE ACCOUNTS RECEIVABLE TURNOVER AGENCY PROBLEMS ASSET VALUE ASYMMETRIC INFORMATION AUDITING BAD DEBT BALANCE SHEET BANKRUPTCY BOOK VALUE BORROWER BORROWING BUSINESS RISK CASH FLOWS CASHFLOW COLLATERALIZATION COMMERCIAL BANKS COMMERCIAL LOANS CREDIT RATIONING CREDIT RISK CURRENT ASSETS DEBT DEPRECIATION DIVIDENDS EMPLOYMENT EXPECTED RETURN EXPECTED VALUE EXPENDITURES EXTERNAL FINANCING FEDERAL RESERVE SYSTEM FINANCIAL RATIOS FINANCIAL RESTRUCTURING FINANCING OPTIONS FIXED ASSETS FIXED COSTS FUTURE CASH FLOW HIGHLY LEVERAGED FIRMS INFORMATION ASYMMETRY INSURANCE INVENTORY INVENTORY TURNOVER LENDER LENDER OF LAST RESORT LENDERS LIQUIDATION LIQUIDATION VALUE LIQUIDITY LOAN LOAN AMOUNT MARKET VALUE MATURITY MORAL HAZARD NPV PRESENT VALUE PRIVATELY HELD COMPANIES PROBABILITY OF DEFAULT PRODUCTIVITY PROFIT MARGIN PROFITABILITY PUBLIC DEBT QUICK RATIO RISK NEUTRAL SALES SELLING SHAREHOLDERS SUBSIDIARIES TANGIBLE ASSETS TRANSACTION COSTS UCC WEALTH WORKING CAPITAL Klapper, Leora The Uniqueness of Short-Term Collateralization |
| relation |
Policy Research Working Paper;No. 2544 |
| description |
The author finds evidence that lines of
credit secured by accounts receivable are associated with
business borrowers with a high risk of default. While an
unsecured short-term loan is repaid from the borrower's
future cash flow, a loan secured by accounts receivable (a
unique form of "inside" collateral) is repaid from
previously generated and observed sales (the borrower's
trade credit terms to its customers). Consequently, lenders
that secure accounts receivable are most concerned with the
credit risk of the borrower's customers and the
borrower's ability to continue to generate new sales. A
stylized theoretical model demonstrates that the value of a
secured line-of-credit loan in minimizing contracting costs
is associated with the borrower's business risk and the
quality of the borrower's customers. Empirical tests on
a sample of publicly traded U.S. manufacturing firms find
that firms with secured line of credit loans are observably
riskier and have fewer expected growth opportunities. The
author's findings suggest that observably riskier
borrowers can borrow more on a secured than on an unsecured
basis. The results highlight the important role of secured
letters of credit in providing liquidity to risky,
credit-constrained firms that might not have access to
external financing through other channels. |
| format |
Publications & Research :: Policy Research Working Paper |
| author |
Klapper, Leora |
| author_facet |
Klapper, Leora |
| author_sort |
Klapper, Leora |
| title |
The Uniqueness of Short-Term Collateralization |
| title_short |
The Uniqueness of Short-Term Collateralization |
| title_full |
The Uniqueness of Short-Term Collateralization |
| title_fullStr |
The Uniqueness of Short-Term Collateralization |
| title_full_unstemmed |
The Uniqueness of Short-Term Collateralization |
| title_sort |
uniqueness of short-term collateralization |
| publisher |
World Bank, Washington, DC |
| publishDate |
2013 |
| url |
http://documents.worldbank.org/curated/en/2001/02/1000481/uniqueness-short-term-collateralization http://hdl.handle.net/10986/15743 |
| _version_ |
1764429603794845696 |