Exogenously Unsecured Creditors and the Pricing and Use of Secured Debt

43 Pages Posted: 17 Jul 2020 Last revised: 15 May 2021

See all articles by Dominique C. Badoer

Dominique C. Badoer

University of Illinois at Chicago - Department of Finance

Mustafa Emin

University of Florida - Department of Finance, Insurance and Real Estate

Christopher M. James

University of Florida - Department of Finance, Insurance and Real Estate

Date Written: May 10, 2021

Abstract

We use litigation risk disclosures under Regulation S-K to investigate the effectiveness of covenants and security in protecting creditors from dilution from other creditors. We argue that covenants are less effective than collateral at protecting unsecured lenders from dilution arising from litigation and other non-debt related claims; claims we refer to as exogenously unsecured. Consistent with this argument we find that disclosures of litigation claims are associated with a significant increase in the spread between a firm’s secured and unsecured debt claims. More important, we find that the propensity of material litigation claims is negatively related to firms’ reliance on secured debt.

Keywords: Litigation, Debt Structure, Dilution, Priority

JEL Classification: G32, G33

Suggested Citation

Badoer, Dominique C. and Emin, Mustafa and James, Christopher M., Exogenously Unsecured Creditors and the Pricing and Use of Secured Debt (May 10, 2021). Available at SSRN: https://ssrn.com/abstract=3623436 or http://dx.doi.org/10.2139/ssrn.3623436

Dominique C. Badoer (Contact Author)

University of Illinois at Chicago - Department of Finance ( email )

2431 University Hall (UH)
601 S. Morgan Street
Chicago, IL 60607-7124
United States

Mustafa Emin

University of Florida - Department of Finance, Insurance and Real Estate ( email )

P.O. Box 117168
Gainesville, FL 32611
United States

Christopher M. James

University of Florida - Department of Finance, Insurance and Real Estate ( email )

P.O. Box 117168
Gainesville, FL 32611-7168
United States
352-392-3486 (Phone)
352-392-0301 (Fax)

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