The Decline of Secured Debt
72 Pages Posted: 10 Jan 2020 Last revised: 12 May 2020
Date Written: December 31, 2019
We document a steady decline in the share of secured debt issued (as a fraction of total corporate debt) in the United States over the twentieth century, with some pickup in this century. Superimposed on this secular trend, the share of secured debt issued is countercyclical. The secular decline in the issuance of collateralized debt seems to result from creditors acquiring greater confidence over time that the priority of their debt claims will be respected even if they do not obtain security up front. Borrowers also do not seem to want to lose financial and operational flexibility by giving security up front. Instead, security is given on a contingent basis – when a firm approaches distress. Similar arguments explain why debt is more likely to be secured in the down phase of a cycle than in the up phase, thus accounting for the cyclicality of secured debt share.
Keywords: Corporate Finance, Development of the American Economy, Economic Fluctuations and Growth, Law and Economics
JEL Classification: G32, K22, N12
Suggested Citation: Suggested Citation