Debt and Assets

Efraim Benmelech, Nitish Kumar and Raghuram Rajan

No 34008, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We examine the importance of corporate assets in supporting debt. Prior studies typically see only secured debt as asset backed, while the rest is deemed cash flow based. This implies only a small fraction of US debt is asset backed. Yet because corporations often resist offering security explicitly to debt, much unsecured debt is implicitly asset backed. Moreover, we find that the degree to which unsecured debt is asset backed can change with a firm’s condition and the economic situation. Consequently, asset values can affect the quantum and price of borrowing, with effects accentuated in adverse economic conditions, as suggested by financial accelerator theories. Given that a corporation’s debt is typically supported by both expected cash flows and assets, with the relative support varying with time and situation, the industry practice of classifying debt as “asset based” or “cash flow based” is overly categorical, especially for long term corporate bonds.

JEL-codes: E50 G3 G33 (search for similar items in EconPapers)
Date: 2025-07
Note: AP CF EFG ME
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