Collateral Pricing

36 Pages Posted: 6 Feb 2007

See all articles by Efraim Benmelech

Efraim Benmelech

Northwestern University - Kellogg School of Management; National Bureau of Economic Research (NBER)

Nittai Bergman

Tel Aviv University; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: January 2007

Abstract

We examine how collateral affects the cost of debt capital. Theories based on borrower moral hazard and limited pledgeable income predict that collateral increases the availability of credit and reduces its price. Testing these theories is complicated by the very selection problem which they imply: creditors will demand collateral precisely from those borrowers who are riskier. This selection problem leads to a positive relation in the data between the presence of collateral and the loan yield. Analyzing the extensive margin of collateral use, therefore, masks the hypothesized negative impact that collateral exhibits on debt yields. To alleviate this problem, we analyze the intensive, rather than extensive, margin of collateral use. We construct a novel data set of secured credit issued by U.S. airlines. Our results show that debt tranches that are secured by more redeployable collateral exhibit higher credit ratings and lower credit spreads. Our results suggest that the ability to pledge collateral, and in particular redeployable collateral, lowers the cost of external financing.

Keywords: Collateral, Secured debt, Redeployability, Airlines

JEL Classification: G31, G33,

Suggested Citation

Benmelech, Efraim and Bergman, Nittai, Collateral Pricing (January 2007). AFA 2008 New Orleans Meetings Paper. Available at SSRN: https://ssrn.com/abstract=960787 or http://dx.doi.org/10.2139/ssrn.960787

Efraim Benmelech (Contact Author)

Northwestern University - Kellogg School of Management ( email )

Evanston, IL 60208
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Nittai Bergman

Tel Aviv University

Ramat Aviv
Tel-Aviv, 6997801
Israel

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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