How Do Laws and Institutions Affect Recovery Rates for Collateral?

Using unique internal bank data on ex ante appraised liquidation and market values of assets pledged as collateral in sixteen countries, we show that laws and institutions that strengthen creditor protection increase expected recovery rates for collateral. Stronger creditor protection increases expected recovery rates for movable collateral relative to immovable collateral and shifts the composition of collateral toward movable assets, thereby increasing debt capacity through both higher loan-to-values and attenuating the creditor’s liquidation bias. Our results suggest that the recovery rate for collateral is an important first-stage mechanism through which creditor protection can improve contracting efficiency and enhance access to credit. Received September 17, 2018; editorial decision July 9, 2019 by Editor Andrew Ellul.