The (un)secured debt puzzle: evidence for U.S. public firms

Collateral availability determines secured debt, while creditworthiness determines unsecured debt. Both are relevant for the debt structure. Regardless of the benefits that pledging collateral may offer, firms substitute away from secured debt as financial constraints relax. An increase in the share of unsecured debt leads to an increase in investment. A higher investment and the preference for unsecured debt can be explained by firms’ desire to minimize financing costs, spreads on unsecured debt are on average lower. This novel evidence complements existing literature on the collateral channel.