The Decline of Secured Debt
We document a steady decline in the share of secured debt issued (as a fraction of total debt) in the United States over the twentieth century, with some pickup in this century. Superimposed on this secular trend, the share of secured debt issued is countercyclical. The secular decline in secured debt issuance seems to result from creditors acquiring greater confidence over time that the priority of their debt claims will be respected even if they do not obtain security up front. Borrowers also do not seem to want to lose financial and operational flexibility by giving security up front. Instead, security is given on a contingent basis – when a firm approaches distress. Similar arguments explain why debt is more likely to be secured in the down phase of a cycle than in the up phase, thus accounting for the cyclicality of secured debt share.
Efraim Benmelech is with the Kellogg School of Management and NBER, Nitish Kumar with the University of Florida, and Raghuram Rajan with the University of Chicago Booth School and NBER. The authors thank Douglas Baird, Jason Donaldson, Mark Flannery, Carola Frydman, John Graham, Joao Granja, Chris James, Christian Leuz, Kai Li, Yueran Ma, Michael Minnis, Giorgia Piacentino, Michael Roberts, Adriano Rampini, Andrei Shleifer, David Skeel and seminar participants at the Kellogg School of Management, Northwestern University Economic History and Finance seminars, University of British Columbia Sauder School of Business, University of Rochester and the Stockholm School of Economics for very helpful comments and discussions. Honghao Wang provided outstanding research assistance. Rajan thanks the Fama Miller Center, IGM, and the Stigler Center at Chicago Booth for funding. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.