Why Do Firms Issue Secured Debt?
Board of Governors of the Federal Reserve System
Adam C. Kolasinski
Texas A&M, Mays School of Business
October 10, 2016
We empirically examine theories of secured debt. Credit risk and asset volatility increase with secured debt issuance, and the strength of this association is unrelated to contemporaneous investment. Hand-collected data reveals most secured debt is secured on all assets of the firm and rarely originates from collateralizing unsecured debt. A difference-in-differences analysis shows that shocks to the likelihood of debt overhang have no impact on the mix of secured and unsecured debt issued. Most secured debt is issued to bond against expropriating lenders rather than as described in theories related to debt overhang, facilitation of risk-shifting, and monitoring.
Number of Pages in PDF File: 59
Keywords: Secured debt, capital structure, risk shifting, debt overhang
JEL Classification: G32, G31
Date posted: November 2, 2014 ; Last revised: October 19, 2016