Collateral Pricing

Efraim Benmelech and Nittai K. Bergman

No 13874, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We examine how collateral affects the cost of debt capital. Theories based on borrower moral hazard and limited pledgeable income predict that collateral increases the availability of credit and reduces its price. Testing these theories is complicated by the very selection problem which they imply: creditors will demand collateral precisely from those borrowers who are riskier. This selection problem leads to a positive relation in the data between the presence of collateral and the loan yield. Analyzing the extensive margin of collateral use, therefore, masks the hypothesized negative impact that collateral exhibits on debt yields. In this paper, we alleviate this problem by focusing on a particular industry and examining its intensive, rather than extensive, margin of collateral use. Using a novel data set of secured debt issued by U.S. airlines, we construct industry-specific measures of collateral redeployability. We show that debt tranches that are secured by more redeployable collateral exhibit lower credit spreads, higher credit ratings, and higher loan-to-value ratios -- an effect which our estimates show to be economically sizeable. Our results suggest that the ability to pledge collateral, and in particular redeployable collateral, lowers the cost of external financing and increases debt capacity.

JEL-codes: G12 G24 G32 G33 L93 (search for similar items in EconPapers)
Date: 2008-03
New Economics Papers: this item is included in nep-cfn and nep-cta
Note: AP CF
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Published as Benmelech, Efraim & Bergman, Nittai K., 2009. "Collateral pricing," Journal of Financial Economics, Elsevier, vol. 91(3), pages 339-360, March.

Downloads: (external link)
http://www.nber.org/papers/w13874.pdf (application/pdf)

Related works:
Journal Article: Collateral pricing (2009)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:13874

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w13874

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().