Why Do Firms Issue Secured Debt?

59 Pages Posted: 2 Nov 2014 Last revised: 19 Oct 2016

Jack Bao

Board of Governors of the Federal Reserve System

Adam C. Kolasinski

Texas A&M, Mays School of Business

Date Written: October 10, 2016

Abstract

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.

Keywords: Secured debt, capital structure, risk shifting, debt overhang

JEL Classification: G32, G31

Suggested Citation

Bao, Jack and Kolasinski, Adam C., Why Do Firms Issue Secured Debt? (October 10, 2016). Available at SSRN: https://ssrn.com/abstract=2517670 or http://dx.doi.org/10.2139/ssrn.2517670

Jack Bao (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Adam C. Kolasinski

Texas A&M, Mays School of Business ( email )

360 Wehner
College Station, TX 77843-4218
United States

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