The Benefits and Costs of Secured Debt

Efraim Benmelech ()
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Efraim Benmelech: Kellogg School of Management, Northwestern University, Chicago, Illinois, USA

Annual Review of Financial Economics, 2024, vol. 16, issue 1, 325-342

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 article surveys the burgeoning empirical literature on secured debt and provides an assessment of the costs and benefits of secured debt.

Keywords: credit markets; collateral; secured debt (search for similar items in EconPapers)
JEL-codes: G01 G23 G32 G33 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1146/annurev-financial-082123-105311

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