The Decline of Secured Debt

Benmelech, Efraim; Kumar, Nitish; Rajan, Raghuram G.

doi:10.2139/ssrn.3512974

Cited by 7 publications

(13 citation statements)

References 69 publications

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“…Compared to the effect of CSR on unsecured debt, we conclude that good CSR performance can substitute collateral as an indicator of a firm's creditworthiness and reduce the banks' credit risk. This is also consistent with the results of Benmelech et al (2020) that firms with low risk prefer unsecured debt.…”

Section: Additional Analysissupporting

confidence: 91%

“…Overall, current literature argues that good CSR performance mitigates the borrower's idiosyncratic risk and helps them ensure favorable loan terms, but scholars tend not to examine the mechanisms empirically and ignore the heterogeneity of bank debts. Additionally, Benmelech et al (2020) document a steady decline in the proportion of secured debt issued during the twentieth century. One of the reasons is that borrowers do not want to lose financial and operational flexibility for collateral.…”

Section: Literature Reviewmentioning

confidence: 99%

“…Therefore, banks will have higher requirements for unsecured loans in terms of controlling loan risk. Theoretical works and empirical studies also show that high credit-quality firms rely exclusively on unsecured loans, whereas low creditquality firms rely more on secured loans (Benmelech et al, 2020;Luk & Zheng, 2018;Rauh & Sufi, 2010).…”

Section: Determinants Of Unsecured Debtmentioning

confidence: 99%

“…Third, this paper contributes to the debate on the borrowers' preference for different types of bank debt. Chan and Kanatas (1985) argue that secured debt enables high-quality firms to signal their creditworthiness by providing collateral, whereas Benmelech et al (2020) found that borrowers do not want to compromise their financial and operational flexibility by offering collateral, and prefer unsecured debt instead. If good CSR performance can help improve information transparency, mitigate moral hazard and default risk, it is very interesting to observe whether good CSR performance can substitute collateral for signaling a firm's creditworthiness.…”

Section: Introductionmentioning

confidence: 99%

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Corporate Social Responsibility and Unsecured Debt: Evidence from China

Chen¹,

Ma²,

Shi³

et al. 2020

JAFEB

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This study aims to investigate whether Corporate Social Responsibility (CSR) performance can help companies gain more bank unsecured loans. Additionally, this study analyzes the moderating effect of firm size and industry characteristics. Data was collected through the case of companies listed on the Shanghai Stock Exchange or the Shenzhen Stock Exchange in China between 2009 and 2018 with 5373 firmyear observations. The results of multivariable regression analysis show that good CSR performance exhibits a strong positive impact on unsecured debt, including short-term, long-term, and total unsecured debt, which indicates that corporate with good CSR performance can borrow more unsecured debt. further research shows that this effect is more pronounced for small enterprises and firms operating in heavy-polluting industries. Additionally, research on the impact mechanism finds that good CSR performance can help mitigate information asymmetry between borrower and lender, reduce moral hazard of borrower, and obtain support from key stakeholders, and therefore reduces the risk of default. The findings of this study suggest that firms with good CSR performance exhibit a preference for unsecured debt, but decline to provide collateral for debt. Overall, we emphasize and illustrate the important role of corporate CSR in bank credit financing.

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Section: Additional Analysissupporting

confidence: 91%

Section: Literature Reviewmentioning

confidence: 99%

Section: Determinants Of Unsecured Debtmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

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Corporate Social Responsibility and Unsecured Debt: Evidence from China

Chen¹,

Ma²,

Shi³

et al. 2020

JAFEB

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“…Our paper contributes to the literature on pledgeability, collateral and corporate investment (see, e.g., Kiyotaki and Moore (1997), Viswanathan (2013, 2019) and Li, Whited and Wu (2016)). While these papers largely emphasize the positive role of collateral in relaxing a firm's financing constraint, the declining reliance on secured debt by US firms in recent decades (Benmelech, Kumar and Rajan (2020)) suggests that greater effort should be devoted to understanding the costs of greater pledgeability for firms (see, e.g., Rampini and Viswanathan (2020)). We contribute to this debate by providing micro-foundations for the costs of high pledgeability, in terms of softening a lender's budget constraint and making it harder for credit to be allocated efficiently.…”

Section: Literature Reviewmentioning

confidence: 99%

The Pitfalls of Pledgeable Cash Flows: Soft Budget Constraints, Zombie Lending and Under-Investment

2021

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Secured credit and bankruptcy resolution

Adler,

Capkun

2023

J Empirical Legal Studies

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Accepted wisdom holds that secured creditors favor liquidation of a debtor in bankruptcy even where the debtor may be more valuable as a going concern. This is false wisdom, however. Holders of senior claims can be expected to favor liquidation prior to a debtor's bankruptcy because the return on such claims are capped by the amount owed while debtor asset values fluctuate. But bankruptcy is a day of reckoning that can eliminate a creditor's exposure to value fluctuation. For this reason, we expect that modern bankruptcy practice, with the secured creditor often firmly in control, does not unduly encourage liquidation. In fact, we expect any bias to favor reorganization, which can be manipulated for the benefit of any party in control of the bankruptcy process. Our results are consistent with this hypothesis. In a broad study of US corporate bankruptcy cases, we find that secured credit is positively and significantly correlated with the reorganization of insolvent debtors.

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The Decline of Secured Debt

Cited by 7 publications

References 69 publications

Corporate Social Responsibility and Unsecured Debt: Evidence from China

Corporate Social Responsibility and Unsecured Debt: Evidence from China

The Pitfalls of Pledgeable Cash Flows: Soft Budget Constraints, Zombie Lending and Under-Investment

Secured credit and bankruptcy resolution

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