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 paper surveys the burgeoning empirical literature on secured debt and provides an assessment of the costs and benefits of secured debt.
Authors
- Acknowledgements & Disclosure
- This paper has been prepared for The Annual Review of Financial Economics and is based on my long-term collaborative work with Nittai Bergman as well as my collaborations on collateral and secured debt with Jennifer Dlugosz, Mark Garmaise, Victoria Ivashina, Nitish Kumar, Tobias Moskowitz, Raghuram Rajan, and Christopher Rigsby. I am indebted to Patrick Bolton for suggesting that I write this survey. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research.
- DOI
- https://doi.org/10.3386/w32353
- Published in
- United States of America
