YEH-NING CHEN2019-07-242019-07-242006-02-0110629769https://scholars.lib.ntu.edu.tw/handle/123456789/414937This paper proposes that the timing for when collateral is pledged will affect the lenders' incentives to resolve financial distress. It demonstrates that, if the amount of collateral pledged in a loan contract exceeds a critical value, the borrower's project may be inefficiently liquidated once he becomes financially distressed. It also shows that a fairly priced loan guarantee provided by a third party can partially alleviate this inefficient liquidation problem. This paper predicts that riskier borrowers will pledge more collateral, which is consistent with the empirical findings of Berger and Udell [Berger, A. N., & Udell, G. F. (1990). Collateral, loan quality, and bank risk. Journal of Monetary Economics, 25, 21-42] and Leeth and Scott [Leeth, J. D., & Scott, J. A. (1989). The incidence of secured debt: evidence from the small business community. Journal of Financial and Quantitative Analysis, 24, 379-394]. © 2005 Board of Trustees of the University of Illinois. All rights reserved.Collateral | Financial distress | Loan guarantee | Renegotiationjournal articlehttps://api.elsevier.com/content/abstract/scopus_id/3364462168610.1016/j.qref.2004.10.0012-s2.0-33644621686https://api.elsevier.com/content/abstract/scopus_id/33644621686