Collateralised lending: the role of future time reference in languages

Abstract

Collateral has a central role in bank lending. It may serve as a signalling device for borrower quality, play a disciplinary role in the behaviour of the borrower, and mitigate the creditors’ perceived risks and actual losses in the occasion of the borrower’s default. Interestingly, the percentage of loans that is collateralized varies greatly across countries. Using a dataset that consists primarily of small and medium enterprises (SMEs) we examine whether differences in the future time reference in languages across countries can explain the probability to pledge collateral. Our results show that the probability of requesting collateral is higher in countries with languages that do not use an explicit tense to mark future timing (i.e. weak-FTR languages). This result holds across various robustness tests and the use of instrumental variable techniques. Furthermore, we find that weak-FTR in languages enhances the value of collateral as a percentage of loan value. Finally, the results show that the weak-FTR in languages has a stronger impact on the probability of requesting collateral when banks operate in an environment with higher uncertainty.

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