Collateral Damaged? Priority Structure, Credit Supply, and Firm Performance
91 Pages Posted: 25 Nov 2015 Last revised: 26 Mar 2019
Date Written: March 21, 2019
A unique legal reform in 2004 in Sweden redistributed liquidation proceeds from banks holding floating liens to unsecured creditors. Using a country-wide panel of all registered firms, we document that the resulting reduction in collateral capacity contracts the amount and maturity of corporate debt and leads firms to slow investment and forego growth. Altering their allocation of assets, firms reduce particularly those assets with a low collateralizable value for banks and also hoard more cash. However, the reform has no impact on corporate capital intensity or efficiency, suggesting that under these newly binding credit constraints firms simply shrink their operations.
Keywords: Collateral, investment, financial constraints, differences-in-differences, floating lien, seniority
JEL Classification: D22, G31, G32
Suggested Citation: Suggested Citation