Two Tales of Debt
We study the nature of debt among US non-financial firms and its determinants. One approach of debt enforcement lends against the liquidation value of discrete assets (such as fixed assets or working capital). Another approach lends against the going-concern value of the business. Using a new dataset on the liquidation value of different types of assets as well as the going-concern value of distressed firms across major industries, we present several findings. First, non-financial firms have limited liquidation values from fixed assets and working capital, which sum to around 23% of book assets for the average firm. Second, firms with lower liquidation values have more loans with monitoring and tighter performance covenants. Third, lower liquidation values are associated with higher interest rates, but only for debt against discrete assets. We finally present a model that matches the main findings, which demonstrates how covenants and control right institutions facilitate borrowing well beyond liquidation values.
We thank Bo Becker, Mitchell Berlin, Doug Diamond, Victoria Ivashina, Steve Kaplan, Anil Kashyap, Justin Murfin, Raghu Rajan, Per Stromberg, Amir Sufi, and seminar participants at Chicago Booth, Chinese University of Hong Kong, NYU Stern, the Philadelphia Fed, Swedish House of Finance, the University of Hawaii, and WashU Olin for insightful comments. We also thank finance professionals John Coons and Doug Jung for sharing their knowledge. We are grateful to Fatin Alia Ali, Leonel Drukker, Abbas Rezaei, and Julien Weber for outstanding research assistance. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.