How Does Access to the Unsecured Debt Market Affect Investment?

Abstract

analyze the relevance of debt composition (secured versus unsecured) for the association between col- lateral and investment. I study a negative shock to the cost and availability of unsecured debt. A decrease in the share of unsecured debt leads to a reduction in investment. The substitution toward secured debt results in asset encumbrance, higher interest rates, and the presence of covenants. The minimization of financing costs is one mechanism through which the priority composition of debt impacts investment. The results complement evidence on the collateral channel with a novel focus on debt structure.