Secured or Unsecured? The Role of Asset Market Liquidity in Debt Structure

We find evidence that asset market liquidity impacts a firm’s choice between secured and unsecured debt. We use real estate firm data and instrumental variables to estimate a proxy for an individual firm’s exposure to the underlying market liquidity of its assets. We find a positive relationship between the underlying asset market liquidity of a firm and its unsecured-to-total-debt ratio; that an increase in a firm’s asset market liquidity leads to a positive incremental change in its unsecured debt; and that when a firm’s underlying asset markets are more liquid, it is more likely to issue unsecured corporate bonds. Our results remain robust to (a) examining alternative asset market liquidity measures, (b) adjusting for liquidity shocks, (c) controlling for asset quality and redeployability, (d) adding stock market liquidity, (e) capturing the level of unencumbered assets, and (f) excluding firms that focus on residential asset investment