Why Do Firms Issue Secured Debt?

59 Pages Posted: 2 Nov 2014 Last revised: 19 Oct 2016

See all articles by Jack Bao

Jack Bao

University of Delaware - Department of Finance

Adam C. Kolasinski

Texas A&M University - Department of Finance

Date Written: October 10, 2016

Abstract

We empirically examine theories of secured debt. Credit risk and asset volatility increase with secured debt issuance, and the strength of this association is unrelated to contemporaneous investment. Hand-collected data reveals most secured debt is secured on all assets of the firm and rarely originates from collateralizing unsecured debt. A difference-in-differences analysis shows that shocks to the likelihood of debt overhang have no impact on the mix of secured and unsecured debt issued. Most secured debt is issued to bond against expropriating lenders rather than as described in theories related to debt overhang, facilitation of risk-shifting, and monitoring.

Keywords: Secured debt, capital structure, risk shifting, debt overhang

JEL Classification: G32, G31

Suggested Citation

Bao, Jack and Kolasinski, Adam C., Why Do Firms Issue Secured Debt? (October 10, 2016). Available at SSRN: https://ssrn.com/abstract=2517670 or http://dx.doi.org/10.2139/ssrn.2517670

Jack Bao (Contact Author)

University of Delaware - Department of Finance ( email )

Alfred Lerner College of Business and Economics
Newark, DE 19716
United States

Adam C. Kolasinski

Texas A&M University - Department of Finance ( email )

360 Wehner
College Station, TX 77843-4218
United States

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