Collateral, Risk, and Borrowing Capacity
61 Pages Posted: 18 Mar 2017 Last revised: 5 Jun 2018
Date Written: May 30, 2018
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: Suggested Citation