Real Assets and the Limits of Debt Capacity: Theory and Evidence
42 Pages Posted: 13 Apr 2012 Last revised: 25 Feb 2016
Date Written: February 24, 2016
Abstract
This paper considers how collateral is used to finance a going concern. The theory shows that better quality (unobservably higher-valued) firms separate themselves by committing to maintain a strong balance sheet, something lesser quality firms find too costly to do. Lower quality firms instead issue secured debt by pledging real collateral. During turbulent financial periods, however, pooling occurs in the secured debt market, which raises the average quality of firms choosing to finance in that market. Empirical results support model predictions, where we use the 1998 Russian crisis in combination with the role played by Fannie Mae and Freddie Mac for apartment REITs to highlight the relation between financing outcomes and firm type.
Keywords: Real Assets, Collateral, Limits of Debt Capacity, Fannie Mae-Freddie Mac, Apartment, Russian Crisis
JEL Classification: G31, G32
Suggested Citation: Suggested Citation
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