Working Paper: NBER ID: w27641
Authors: Amir Kermani; Yueran Ma
Abstract: We analyze the heterogeneous nature of corporate debt contracts, some focusing on liquidation values of discrete assets whereas others on going-concern values of the business. Using hand-collected data on firm attributes, we present several findings. First, firms on average have limited liquidation values. Second, companies with lower liquidation values have more debt backed by going-concern values and more intensive monitoring of firm performance. They have higher interest rates only for debt against discrete assets. Third, secured debt is not always tied to liquidation values of discrete assets. We present a model that matches the empirical findings, which demonstrates how creditor monitoring and covenants facilitate borrowing well beyond liquidation values.
Keywords: corporate debt; liquidation value; going-concern value; creditor monitoring
JEL Codes: G32; G33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Lower liquidation values (G33) | More debt backed by going-concern values (G32) |
| Lower liquidation values (G33) | Increased intensity of creditor monitoring (G21) |
| Lower liquidation values (G33) | Higher interest rates associated with debt against discrete assets (E43) |
| Lower liquidation values (G33) | Secured cash flow-based debt prevalence (G21) |