Hostname: page-component-77c89778f8-5wvtr Total loading time: 0 Render date: 2024-07-16T19:26:23.692Z Has data issue: false hasContentIssue false
  • English
  • Français

The Incidence of Secured Debt: Evidence from the Small Business Community

Published online by Cambridge University Press:  06 April 2009

John D. Leeth  and
Jonathan A. Scott
Get access Rights & Permissions [Opens in a new window]

Abstract

Critics claim that theories of secured debt fail to explain the widespread use of collateral because they incorrectly predict when a loan will be secured. This paper provides the first rigorous statistical test of the transaction cost models of secured debt. Data from two samples of over 1,000 small business loans generally support the common set of predictions of these theories. The incidence of secured debt is positively related to probability of default, loan size, loan maturity, and marketability of assets. Changes in the legal and economic environment also alter firms' decisions regarding the pledging of collateral.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 24 , Issue 3 , September 1989 , pp. 379 - 394
Copyright
Copyright © School of Business Administration, University of Washington 1989

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Altman, E. I.; Haldeman, R. G.; and Narayanan, P.. “Zeta Analysis: A New Model to Identify Bankruptey Risk of Corporations.” Journal of Banking and Finance, 1 (06 1977), 29–54.Google Scholar
Benjamin, D. K. “The Use of Collateral to Enforce Debt Contracts.” Economic Inquiry, 16 (07 1978), 333–359.CrossRefGoogle Scholar
Barro, R. J. “The Loan Market, Collateral, and Rates of Interest.” Journal of Money, Credit, and Banking, 8 (11 1976), 439–456.Google Scholar
Chan, Y. S., and Kanatas, G.. “Asymmetric Valuations and the Role of Collateral in Loan Agreements.” Journal of Money, Credit, and Banking, 17 (02 1985), 84–95.Google Scholar
Diamond, D. W. “Reputation Acquisition in Debt Markets.” Working Paper, Graduate School of Business, Univ. of Chicago (1985).Google Scholar
Dickerson, O. D., and Kawaja, M.. “The Failure Rates of Business.” In The Financing of Small Business, Pfeffer, I., ed. New York, NY: MacMillan (1967).Google Scholar
Fama, E. F. “The Effects of a Firm's Investment and Financing Decisions on the Welfare of Its Security Holders.” American Economic Review, 68 (06 1978), 272–284.Google Scholar
Fisher, L. “Determinants of Risk Premiums on Corporate Bonds.” Journal of Political Economy, 67 (06 1959), 217–237.CrossRefGoogle Scholar
George, R. G. “Instability of Corporate Risk Premiums.” Unpubl. Ph.D. Diss., Univ. of Chicago, Dept. of Economics (1983).Google Scholar
Glassman, C. A., and Struck, P. L.. “Survey of Commercial Bank Lending to Small Business.” Washington, D.C.: Interagency Task Force on Small Business Finance (1982).Google Scholar
Jackson, T. H., and Kronman, A. T.. “Secured Financing and Priorities among Creditors.” The Yale Law Journal, 88 (05 1979), 1143–1182.Google Scholar
Judge, G. G.; Griffiths, W. E.; Hill, R. C.; and Lee, T. C.. The Theory and Practice of Econometrics. New York, NY: John Wiley & Sons (1980).Google Scholar
Myers, S. C. “Determinants of Corporate Borrowing.” Journal of Financial Economics, 5 (11 1977), 147–175.Google Scholar
National Federation of Independent Business. Credit, Banks and Small Business. San Mateo, CA: National Federation of Independent Business (1983).Google Scholar
Schwartz, A. “Security Interests and Bankruptcy Priorities: A Review of Current Theories.” The Journal of Legal Studies, 10 (01 1981), 1–37.Google Scholar
Scott, J. A., and Smith, T. C.. “The Effect of the Bankruptcy Reform Act of 1978 on Small Business Loan Pricing.” Journal of Financial Economics, 16 (05 1986), 119–140.Google Scholar
Scott, J. H. Jr, “Bankruptcy, Secured Debt, and Optimal Capital Structure.” Journal of Finance, 32 (03 1977), 1–19.Google Scholar
Scott, J. H. Jr, “Bankruptcy, Secured Debt, and Optimal Capital Structure: Reply.” Journal of Finance, 34 (03 1979), 253–260.Google Scholar
Smith, C. W. Jr, and Warner, J. B.. “Bankruptcy, Secured Debt and Optimal Capital Structure: Comment.” Journal of Finance, 34 (03 1979a), 247–251.Google Scholar
Smith, C. W. Jr, and Warner, J. B.. “On Financial Contracting: An Analysis of Bond Covenants.” Journal of Financial Economics, 7 (06 1979b), 117–161.Google Scholar
Stulz, R. M., and Johnson, H.. “An Analysis of Secured Debt.” Journal of Financial Economics, 14 (12 1985), 501–521.Google Scholar
Warner, J. B. “Bankruptcy, Absolute Priority, and the Pricing of Risky Debt Claims.” Journal of Financial Economics, 4 (05 1977), 239–276.Google Scholar