Collateral pledge, sunk-cost fallacy and mortgage default

Collateral pledge, sunk-cost fallacy and mortgage default

Individuals and firms pledge collateral to mitigate agency costs or contracting frictions in a world with asymmetric information. However, the option value theory suggests that once the mark-to-market asset valuation is below the current debt, the firms and individuals should default on their debt c...

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Veröffentlicht in:Journal of financial intermediation 2015-10, Vol.24 (4), p.636-652
Hauptverfasser: Agarwal, Sumit, Green, Richard K., Rosenblatt, Eric, Yao, Vincent
Format: Artikel
Sprache:eng
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Collateral
Default
Mark to market accounting
Mortgages
Studies
Valuation
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container_title Journal of financial intermediation
container_volume 24
creator Agarwal, Sumit
Green, Richard K.
Rosenblatt, Eric
Yao, Vincent
description Individuals and firms pledge collateral to mitigate agency costs or contracting frictions in a world with asymmetric information. However, the option value theory suggests that once the mark-to-market asset valuation is below the current debt, the firms and individuals should default on their debt contract irrespective of the initial collateral pledged. In this paper, we estimate default models and find that after controlling for mark-to-market asset valuation, initial collateral remains an important predictor of mortgage default. Specifically, individuals that pledge higher collateral have a lower hazard to default. Our results are consistent with models of sunk cost fallacy.
doi_str_mv 10.1016/j.jfi.2014.10.001
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subjects Collateral
Default
Mark to market accounting
Mortgages
Studies
Valuation
title Collateral pledge, sunk-cost fallacy and mortgage default
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