Sunday, Jan. 3, 2021 10:00 AM - 12:00 PM (EST)
- Chair: Mark Leary, Washington University in St. Louis
Secured Credit Spreads and the Issuance of Secured Debt
AbstractWe show that after accounting for selection, credit spreads for secured debt issuances are lower than for unsecured debt issuances, especially when a firm’s credit quality deteriorates, the economy slows, or average credit spreads widen. Yet firms tend to be reluctant to issue secured debt when other forms of financing are available, as we demonstrate with an analysis of security issuance over time and in particular around the COVID-19 pandemic shock in the United States in early 2020. We find that for firms that are rated non-investment grade and that have few alternative sources of financing in difficult times, the likelihood of secured debt issuance is positively correlated with the spread between traded unsecured and secured bonds. It is not correlated for firms that are investment grade. This pattern of issue behavior is consistent with theories that see collateral as a form of insurance, to be used only in extremis.
Options Trading and Corporate Debt Structure
AbstractRecent empirical studies find that options trading enhances firm value by allowing for a more efficient allocation of firm resources. In this paper, we develop and test the hypothesis that, in addition to a more efficient allocation of firm resources, options trading also enhances firm value through a financing channel, by promoting a debt structure that relies more on public debt and less on more expensive bank financing. Consistent with the hypothesis that enhanced informational efficiency associated with options trading reduces the demand for superior information processing and creditor governance from bank loans, we find active equity options trading leads the firms to shift from bank loans to public bonds. The results are concentrated in firms with high information asymmetry.
- G3 - Corporate Finance and Governance