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    Collateralized subsample

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    Here is a fictitious academic paper:

    "We consider a sample of 254 firms over the period 1996-1999. We find that 80% of interviewed entrepreneurs would be ready to pay an extra 4% on their loans in order to be able to borrow more. We interpret this evidence that banks forgo highly profitable investment opportunities. The size of such inefficiency appears to be at offs with the well documented efficiency of other financial sectors. We provide possible explanations for the inefficiency in terms of bureaucracy and mismanagement which are likely to affect the Banking sector more than other financial sectors. Finally, we document the existence of puzzle. Apparently, the inefficiency disappears when we restrict attention to a subsample of firms whose loans are fully collateralized. We believe that the striking difference between the collateralized subsample and the rest of the sample is an issue worth of further research".

    - What does the evidence suggest?
    - How could the authors improve their paper?
    - Can you think of any explanation for the "collateralized subsample" puzzle?

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    Solution Preview

    Please refer to the attached file for the response.


    Bank managers have four primary concerns: (1) to make sure that the bank has enough cash to pay its depositors when there are deposit outflows; (2) to pursue an acceptably low level of risk by acquiring assets that have a low rate of default and by diversifying asset holdings; (3) to acquire funds at low cost; and (4) to have adequate amount of capital for bank's needs (Mishkin, 2007). The first concern has something to do with liquidity management, the second with asset management, the third with liability management, and the last has something to do with capital adequacy management.
    In the study conducted by the group among 254 entrepreneurs who are also clients of the banks, 80% were found to be willing to borrow more and would go to the extent of paying additional 4% ...

    Solution Summary

    A collateralized subsample for a fictitious academic paper is provided.