Filed this one under Does Debt have a role in Marco of the 21st Century?
Azariadis, Kaas, and Wen (2015) first decomposed total corporate debt into secured and unsecured debt to study the relationship between firm-level debt and the business cycle. Using Compustat data for nonfinancial publicly traded firms in the United States, they found that the average share of unsecured debt was much larger than the share of secured debt. It was between roughly 80 and 85 percent of total debt before the recent financial crisis and only slightly less than that after…
…show that the amount of unsecured debt is strongly and positively correlated with GDP across all samples (0.70 to 0.75 correlation), while secured debt is only weakly correlated with GDP and its relationship is negative in two of the three samples: the full sample and the sample excluding the largest 1 percent of firms (–0.15 to 0.15 correlation). Moreover, unsecured debt tends to lead GDP by one year—suggesting that it might drive GDP—whereas secured debt tends to lag GDP in the sample that excludes the top 5 percent of firms (Figure 2). Finally, the authors conclude that unsecured debt usefully forecasts GDP, conditioned on the history of GDP, while secured debt is not helpful in predicting GDP…
…This finding is important because conventional macro-finance theories assume the value of collateral—which allows firms to issue secured debt—is the important factor that allows firms to borrow. The data show, however, that unsecured debt is the important driver of economic activity, so the value of collateral is probably not very important. So, at the firm level, unsecured debt is more important than secured debt in understanding the business cycle…
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