How Collateral Affects Borrowing
While a large literature builds on the notion that collateral values boost secured borrowing (“collateral channel”), we show that this dynamic does not hold in the data. We do so using a novel micro-level database on the single most important type of collateral held by U.S. corporations (commercial real estate). This allows us to observe firms’ true real estate holdings and all debts raised against those assets. Firms increase investment following a rise in the value of their real estate holdings, but do so using funds raised primarily from the issuance of unsecured bonds and notes, rather than mortgages and other forms of secured borrowing. We rationalize these findings with a model showing that a firm’s choice between raising secured and unsecured debt depends on the exposure of its assets to systematic risk. Firms’ real estate has significantly higher exposure to systematic risk than other assets, and the wider this gap, the stronger the preference for unsecured debt.
Dr Chau Chak Wing Building
