The secured credit premium and the issuance of secured debt

Efraim Benmelech*, Nitish Kumar, Raghuram Rajan

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

7 Scopus citations

Abstract

Credit spreads for secured debt are lower than for unsecured debt, especially when a firm's credit quality deteriorates, the economy slows, or average credit spreads widen. Yet investment-grade firms tend to be reluctant to issue secured debt at all times. In contrast, we find that for firms that are rated below investment grade, the likelihood of secured debt issuance increases as firm credit quality deteriorates, the economy slows, or average credit spreads widen. This differential pattern of issue behavior is consistent with highly rated firms seeing unencumbered collateral as a form of insurance, to be used only in extremis.

Original languageEnglish (US)
Pages (from-to)143-171
Number of pages29
JournalJournal of Financial Economics
Volume146
Issue number1
DOIs
StatePublished - Oct 2022

Keywords

  • Business cycles
  • Collateral
  • Credit spreads
  • Secured debt

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics
  • Strategy and Management

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