Collateral Spread and Financial Development




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    • Liberti is from The Charles H. Kellstadt Graduate School of Business, DePaul University. Mian is from The University of Chicago Booth School of Business and is affiliated with NBER. We thank Ayesha Aftab, Marianne Bertrand, Douglas Diamond, Asim Ijaz Khwaja, Tim Johnson, Hoelger Mueller, Philip Strahan, Steven Ongena, Manju Puri, Luigi Zingales, and seminar participants at the 2006 American Finance Association Meetings, Duke University (Fuqua), London Business School, and GSB University of Chicago for helpful comments. We are grateful to Ronald Chan for superb research assistance. All errors are our own.


We show that institutions that promote financial development ease borrowing constraints by lowering the collateral spread and shifting the composition of acceptable collateral towards firm-specific assets. Collateral spread is defined as the difference in collateralization rates between high- and low-risk borrowers. The average collateral spread is large but declines rapidly with improvements in financial development driven by stronger institutions. We also show that the composition of collateralizable assets shifts towards non-specific assets (e.g., land) with borrower risk. However, the shift is considerably smaller in developed financial markets, enabling risky borrowers to use a larger variety of assets as collateral.