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

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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.

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