Collateral, Risk, and Borrowing Capacity
55 Pages Posted: 18 Mar 2017 Last revised: 26 Jun 2020
Date Written: June 26, 2020
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: Suggested Citation