NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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The Decline of Secured Debt

Efraim Benmelech, Nitish Kumar, Raghuram Rajan

NBER Working Paper No. 26637
Issued in January 2020
NBER Program(s):Corporate Finance Program, Program on the Development of the American Economy, Economic Fluctuations and Growth Program, Law and Economics Program

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.

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Document Object Identifier (DOI): 10.3386/w26637

 
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