Collateral, bank monitoring and firm performance: the case of newly established wine-farmers

Abstract

This research aims to identify the incentives associated with collaterals in an asymmetric information context and in situations where the bank is the main financial partner of the entrepreneur, which is typically the case for most farms, especially in the wine sector. On the one hand, collaterals may reduce the risk of overinvestment by entrepreneurs and so reduce the risk of repayment default. On the other hand, contracting collaterals may lead the bank to reduce the monitoring effort. In this paper we test these two hypotheses, taking into account the fact that entrepreneurs can benefit from a banking relationship or not. Our results confirm that incentives associated with collaterals depend on bank monitoring, and emphasize the uniqueness of land mortgages. Our results also confirm that the revenue constraint is binding and thus makes critical the question of financial resources for newly established wine farmers.