The Benefits and Costs of Secured Debt

Efraim Benmelech

No 32353, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Secured debt—a debt contract that offers security to creditors in the form of collateralized assets—has been a cornerstone of credit markets in most societies since antiquity. The ability to seize and sell collateral reduces the creditor’s expected losses when the debtor defaults on a promised payment. Moreover, when a firm borrows from multiple creditors with different seniorities, debt secured by assets has higher priority relative to other creditors and is first in line for payment if the firm is bankrupt. While the benefits of secured debt have been shown in both the theoretical and empirical literature, less is known about the costs associated with secured borrowing. This paper surveys the burgeoning empirical literature on secured debt and provides an assessment of the costs and benefits of secured debt.

JEL-codes: G12 G32 G33 (search for similar items in EconPapers)
Date: 2024-04
New Economics Papers: this item is included in nep-ban and nep-cfn
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