Working Paper: NBER ID: w26637
Authors: Efraim Benmelech; Nitish Kumar; Raghuram Rajan
Abstract: The share of secured debt issued (as a fraction of total corporate debt) declined steadily in the United States over the twentieth century. This stems partly from financial development giving creditors greater confidence that high quality borrowers will respect their claims even if creditors do not obtain security up front. Consequently, such borrowers prefer retaining financial flexibility by not giving security up front. Instead, security is given contingently – when a firm approaches distress. This also explains why superimposed on the secular decline, the share of secured debt issued is countercyclical.
Keywords: secured debt; corporate borrowing; financial development; bankruptcy law; economic cycles
JEL Codes: G32; K22; N12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Financial development (O16) | Decline in secured debt issuance (G33) |
| Higher quality corporations (L15) | Eschew upfront security (Y70) |
| Tighter credit conditions (E51) | Utilization of unpledged collateral (G29) |
| Improvements in accounting practices (M41) | Decline in necessity for secured debt (G33) |
| Improvements in bankruptcy laws (K35) | Decline in necessity for secured debt (G33) |
| Economic downturns (E32) | Increase in secured debt issuance (H63) |