The Decline of Secured Debt |
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| Authors: | EFRAIM BENMELECH NITISH KUMAR RAGHURAM RAJAN |
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| Institution: | Efraim Benmelech is with the Kellogg School of Management and NBER. Nitish Kumar is with the Warrington College of Business, University of Florida. Raghuram Rajan is with the University of Chicago Booth School and NBER. We are grateful to the editor (Philip Bond), two anonymous referees, Douglas Baird, Jason Donaldson, Mark Flannery, Carola Frydman, John Graham, Joao Granja, Chris James, Mark Leary, Christian Leuz, Kai Li, Yueran Ma, Michael Minnis, Giorgia Piacentino, Adriano Rampini,, Michael Roberts, Andrei Shleifer, David Skeel, Phil Strahan, and René Stulz and seminar participants at the Kellogg School of Management, NBER 2020 Summer Institute, Northwestern University Economic History and Finance seminars, SFS Cavalcade 2020, University of British Columbia Sauder School of Business, University of Chicago, Georgia Institute of Technology, University of Rochester, the Stockholm School of Economics, the American Economics Association meeting, and the Western Finance Association meeting for very helpful comments and discussions. We are grateful to John Graham, Mark Leary, and Michael Roberts for providing us data. We thank Vanessa Cai, Narayani Gupta, Sanhitha Jugulum, Peiyi Li, Kailash Neelakantan, and Honghao Wang for excellent research assistance. Rajan thanks the Fama Miller Center, IGM, and the Stigler Center at Chicago Booth for funding. We have read The Journal of Finance’s disclosure policy and have no conflicts of interest to disclose. |
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| Abstract: | The share of secured debt issued (as a fraction of total corporate debt) declined steadily in the United States over the twentieth century. This stems partly from financial development giving creditors greater confidence that high-quality borrowers will respect their claims even if creditors do not obtain security upfront. Consequently, such borrowers prefer retaining financial flexibility by not giving security up front. Instead, security is given contingently—when a firm approaches distress. This also explains why, superimposed on the secular decline, the share of secured debt issued is countercyclical. |
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