Collateral, Risk, and Borrowing Capacity

61 Pages Posted: 18 Mar 2017 Last revised: 5 Jun 2018

Panos Markou

University of Cambridge - Judge Business School

Ryan Williams

University of Arizona - Department of Finance

Jie Yang

Board of Governors of the Federal Reserve System

Date Written: May 30, 2018

Abstract

We examine the effect of risk-shifting incentives on the relation between collateral and corporate borrowing capacity. The concurrent increase in gold prices during the 2008-2009 financial crisis provides a positive shock to the collateral value of gold firms, in contrast to the average firm that experienced a negative liquidity shock. Using a difference-in-differences framework, we find that gold firms experience more credit availability via their bank lines of credit during the crisis period relative to non-gold firms. Consistent with lenders supplying credit to firms least likely to engage in risk-shifting behavior, we find this effect prevalent only in financially non-distressed firms with less potential for agency problems and whose credit lines are secured with the firms’ assets. The greater credit availability is also limited to unhedged firms more exposed to price risk.

Keywords: Lines of Credit, Corporate Collateral, Gold Prices, Risk-Shifting, Hedging, Risk Management, Borrowing Capacity

JEL Classification: G30, G32, G21

Suggested Citation

Markou, Panos and Williams, Ryan and Yang, Jie, Collateral, Risk, and Borrowing Capacity (May 30, 2018). Available at SSRN: https://ssrn.com/abstract=2934447 or http://dx.doi.org/10.2139/ssrn.2934447

Panos Markou

University of Cambridge - Judge Business School ( email )

Trumpington Street
Cambridge, CB2 1AG
United Kingdom

Ryan Williams

University of Arizona - Department of Finance ( email )

McClelland Hall
P.O. Box 210108
Tucson, AZ 85721-0108
United States

Jie Yang (Contact Author)

Board of Governors of the Federal Reserve System ( email )

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

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