What Determines Collection Rates of Debt Collection Agencies?

Date01 May 2017
Published date01 May 2017
The Financial Review 52 (2017) 259–279
What Determines Collection Rates of Debt
Collection Agencies?
Timo Beck, Jens Grunert, and Werner Neus
University of Tuebingen
Andreas Walter
University of Giessen
We contribute to the literature on debt collection agencies in two ways:First, we present
an estimation of the collection rates. The distribution of collection rates exhibits a mean of
about 65% and a strong bimodality with peaks at the very ends of the distribution. Second,
we investigate potential determinants of the collection success. We find that collection rates
are positively related to the exposure at default and to prior debtor-specific collection rates. In
contrast, the age of the account and—if applicable—prior experience with the debtor have a
negative impact on collection rates.
Keywords: debt collection agency, collection rate
JEL Classifications: G21, G30
Correspondingauthor: Department of Financial Services, University of Giessen, Licher Strasse 74, 35394
Giessen, Germany; Phone: 49 6419922520; Fax: 49 6419922529; E-mail: andreas.walter@wirtschaft.uni-
We like to thank Jan Riepe, Thomas Pauls, and seminar participants at the University of Muenster, the
University of Trier, and the University of Giessen for comments and discussions. We dedicate special
thanks to the (anonymous) debt collection agency having provided the data. Finally, we are grateful for
numerous valuable comments by two anonymous referees and the Editor, SrinivasanKrishnamurthy.
C2017 The Eastern Finance Association 259
260 T. Beck et al./The Financial Review52 (2017) 259–279
1. Introduction
Trade credit is a very important source for short-term financing.1According to
the Deutsche Bundesbank’s financial statements statistics, trade credit is the most
important source of short-term external financing for nonfinancial corporations in
Germany. In particular,trade credit for these corporations amount to 16% of balance
sheet total (Deutsche Bundesbank, 2012), a fraction that is one percentage point
higher than the respective fraction for short-term bank loans. According to the BACH
database of the European Committee of Central Balance Sheet Data Offices, the
relative importance of trade credit for firms from Italy, France, and Spain is even
higher than in Germany with trade credits adding up to about 20% of the total
balance sheet (Deutsche Bundesbank, 2012). In general, “trade credit” comprises
positions on both sides of the balance sheet. On the liability side, trade payables and
payments received on account classify as trade credit, whereas on the asset side trade
receivables and payments made on account can be subsumed under trade credit. As
our paper focuses on the collection of receivables, we are interested in the asset side.
From a lender’s point of view, the return on a credit is limited to its nominal
interest rate. Given the limited upside potential, the most important notion in credit
policy is risk management. Consequently,there is intensive research on broad fields of
credit risk management, including, for example, valuation of default risk, contractual
provisions like collateral and covenants, and empirical research on various aspects
of credit risk. An important feature is the ex post credit risk management, that is,
the handling of distressed credits. In case of bank loans, the bank itself manages
the process of collecting money. In contrast, in case of trade credits, the suppliers
typically delegate this task to specialized third-party debt collection agencies (DCAs).
Given the importance of trade credit in general and the crucial role of DCAs in
collecting delinquent credit, it seems important to analyze the DCAs’ collection suc-
cess as well as the determinants of collection success. Surprisingly, the distributionof
the collection success of DCA’s and its determinants has hitherto not been analyzed
empirically. We focus on the German market, since Germany is the largest economy
in Europe and its market for collection agencies is highly developed.2Unfortunately,
there is no broad statistical database for this market. In 2012, however,the association
of German DCAs (Bundesverband Deutscher Inkassounternehmen [BDIU]) com-
missioned an industry study on the German collection market. The receivables under
management amount to 55 billion with an average receivable of 646 (BDIU,
2012). Representing about 90% of the German collection market, the BDIU has
1Trade credit has repeatedly been dealt with in the literature. Important contributions include Schwartz
(1974) and Petersen and Rajan (1997). Recently, trade credit has gained substantial attention, again. For
example, Cunat (2007) examines the use of trade credit by means of an analytical model while Klapper,
Laeven and Rajan (2012) empirically analyze trade credit contracts.
2Because our data have been providedby a German collection agency, we report figures about the German
market. See Fedaseyeu (2013, esp. section 3) for an overview of the U.S. collection industry.

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