Collateral and Secured Debt

Adriano Rampini and S Viswanathan

No 33875, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We argue that firms’ assets, especially their tangible assets, serve as collateral restricting both secured and unsecured debt. Secured debt is explicitly collateralized, placing a lien on specific assets, which facilitates enforcement. Unsecured debt is backed by unencumbered assets and thus implicitly collateralized. The explicit collateralization of secured debt entails costs but enables higher leverage. Therefore, financially constrained firms use more secured debt both across and within firms. Our dynamic model is consistent with stylized facts on the relation between secured debt and measures of financial constraints and between leverage and tangible assets, and with evidence from a causal forest.

JEL-codes: D25 E22 G32 (search for similar items in EconPapers)
Date: 2025-05
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