Collateral, Risk, and Borrowing Capacity

52 Pages Posted: 18 Mar 2017 Last revised: 18 Aug 2019

See all articles by Panos Markou

Panos Markou

University of Virginia - Darden School of Business

Ryan Williams

University of Arizona - Department of Finance

Jie Yang

Board of Governors of the Federal Reserve System

Date Written: August 17, 2019

Abstract

We examine the effect of risk-shifting incentives on the relation between collateral and corporate borrowing capacity. The increase in gold prices during the 2008-2009 financial crisis provided 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 have more borrowing capacity with credit lines during the crisis than non-gold firms. However, this effect manifests only in non-distressed firms and firms with secured credit lines, consistent with lenders supplying credit to firms least likely to engage in risk-shifting behavior.

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 (August 17, 2019). Available at SSRN: https://ssrn.com/abstract=2934447 or http://dx.doi.org/10.2139/ssrn.2934447

Panos Markou

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States

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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