Abstract
In competitive credit markets, borrowers and lenders have equal information on default risks. Under these circumstances, loan collateral are less important in credit decision-making. But in emerging credit market, like Indonesia, borrowers and lenders do not possess equal information on firms’ future prospect, making use of collateral in mitigating default risk have become common practice. Despite strong theoretical support for the use of collateral to protect lenders from default risk, excessive protection may have a negative effect on the debt markets. However, some Indonesian firms are not required to provide collateral for bank debts. This study examines the effect of Board of Commissioners independence, governance committees, audit quality, and conservatism on the likelihood of using loan collateral. Using slovin formula, as much as 785 firm listed in Indonesia Stock Exchange were collected during sample period of 2012-2015. Logistic regression analysis suggest that firms with higher Board of Commissioners independence, having separate governance committee, hire Big 4 auditors, apply conservative accounting policies are less likely to provide loan collateral.
Highlights
Bank loans have become major sources of funding for businesses in Indonesia and their contribution to national economic growth are very significant
Since collateral is a binary variable, a test of hypotheses is carried out using logistic regression analysis
The findings suggest that firms with a governance committee are less likely to provide collateral for bank loans
Summary
Bank loans have become major sources of funding for businesses in Indonesia and their contribution to national economic growth are very significant. The Governor of Bank Indonesia once said that bank lending had grown by 12.7% during September 2018 and the largest increase was in the investment loan segments [1]. A research in 2015 conducted by The Financial Services Authority (OJK) found that the allocation of bank lending in the agriculture, labour and forestry sectors had positive effects on regional economic growth in most regions of Indonesia, except Maluku and Papua [38]. Bank loans help firms accelerating growth and expanding various business activities. Firms may use bank loans to execute business plans and to make sure that all claims are paid as scheduled. In return for providing investment credits, banks earn interest revenue.
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