Collateral , Default Risk and Relationship Lending : An Empirical Study on Financial

* This is a substantially revised version of the first draft which circulated under the same title. The data set was generated as a part of the Center for Financial Studies' research project on credit management in Ger-many. Tilburg. Of course, we alone are responsible for all remaining errors. Abstract This paper provides new insights into the nature of relationship lending by analyzing the role of collateral and its real effects with respect to banks' workout decisions if borrowers face financial distress. Using a data set based on the credit files of five leading German banks, we rely on information actually used in the process of bank decision-making. Our results indicate that collateralization of loan contracts is mainly driven by aspects of relationship lending and renegotiation risk. Relationship lenders require more collateral from their debtors than normal lenders for two main reasons. First, collateral locks the borrower into the relationship. Second, it strengthens the bank's bargaining power, thereby deterring costly conflicts in future renegotiations.