TY  - JOUR
AU  - Benmelech,Efraim
AU  - Bergman,Nittai K.
TI  - Collateral Pricing
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 13874
PY  - 2008
Y2  - March 2008
UR  - http://www.nber.org/papers/w13874
L1  - http://www.nber.org/papers/w13874.pdf
N1  - Author contact info:
Efraim Benmelech
Harvard University
Department of Economics
Littauer 233
Cambridge, MA 02138
Tel: 617/496-4787
Fax: 617/495-8570
E-Mail: effi_benmelech@harvard.edu

Nittai Bergman
MIT Sloan School of Management
E52-437
50 Memorial Drive
Cambridge, MA 02142
Tel: 617/253-2933
Fax: 617/258-6855
E-Mail: nbergman@mit.edu
AB  - We examine how collateral affects the cost of debt capital. Theories based on borrower moral hazard and limited pledgeable income predict that collateral increases the availability of credit and reduces its price. Testing these theories is complicated by the very selection problem which they imply: creditors will demand collateral precisely from those borrowers who are riskier. This selection problem leads to a positive relation in the data between the presence of collateral and the loan yield. Analyzing the extensive margin of collateral use, therefore, masks the hypothesized negative impact that collateral exhibits on debt yields. In this paper, we alleviate this problem by focusing on a particular industry and examining its intensive, rather than extensive, margin of collateral use. Using a novel data set of secured debt issued by U.S. airlines, we construct industry-specific measures of collateral redeployability. We show that debt tranches that are secured by more redeployable collateral exhibit lower credit spreads, higher credit ratings, and higher loan-to-value ratios -- an effect which our estimates show to be economically sizeable. Our results suggest that the ability to pledge collateral, and in particular redeployable collateral, lowers the cost of external financing and increases debt capacity.
ER  -