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Collateral, Risk, and Borrowing Capacity

56 Pages Posted: 18 Mar 2017 Last revised: 16 Jul 2017

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: July 2017

Abstract

We examine the effect of collateral on corporate borrowing capacity. While the average firm experienced a negative liquidity shock during the recent financial crisis, the concurrent increase in gold prices provides a positive shock to the collateral value of gold firms. Using this shock, we find that gold firms experience more credit availability via their bank lines of credit during the crisis period relative to non-gold firms. The effect is limited to firms who are less likely to engage in risk-shifting behavior, who do not hedge price risk, and whose credit lines are secured with the firm's assets. Our results do not appear to be driven by changing growth options. Finally, we also document similar results with net debt issuances.

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

JEL Classification: G30, G32, G21

Suggested Citation

Markou, Panos and Williams, Ryan and Yang, Jie, Collateral, Risk, and Borrowing Capacity (July 2017). Available at SSRN: https://ssrn.com/abstract=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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