Two Tales of Debt

83 Pages Posted: 10 Aug 2020 Last revised: 12 Jul 2023

See all articles by Amir Kermani

Amir Kermani

University of California, Berkeley; National Bureau of Economic Research (NBER)

Yueran Ma

University of Chicago - Booth School of Business

Date Written: August 2020

Abstract

We analyze the heterogeneous nature of corporate debt contracts, some focusing on liquidation values of discrete assets whereas others on going-concern values of the business. Using hand-collected data on firm attributes, we present several findings. First, firms on average have limited liquidation values. Second, companies with lower liquidation values have more debt backed by going-concern values and more intensive monitoring of firm performance. They have higher interest rates only for debt against discrete assets. Third, secured debt is not always tied to liquidation values of discrete assets. We present a model that matches the empirical findings, which demonstrates how creditor monitoring and covenants facilitate borrowing well beyond liquidation values.

Suggested Citation

Kermani, Amir and Ma, Yueran, Two Tales of Debt (August 2020). NBER Working Paper No. w27641, Available at SSRN: https://ssrn.com/abstract=3670476

Amir Kermani (Contact Author)

University of California, Berkeley ( email )

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Berkeley, CA 94720
United States

HOME PAGE: http://faculty.haas.berkeley.edu/amir/research/research.html

National Bureau of Economic Research (NBER) ( email )

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Cambridge, MA 02138
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Yueran Ma

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

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