Two Tales of Debt

Abstract

We analyze the heterogeneous nature of corporate debt contracts, some focusing on liquidation values of discrete assets whereas others on going-concern values of the business.Using handcollected data on firm attributes, we present several findings.First, firms on average have limited liquidation values.Second, companies with lower liquidation values have more debt backed by going-concern values and more intensive monitoring of firm performance.They have higher interest rates only for debt against discrete assets.Third, secured debt is not always tied to liquidation values of discrete assets.We present a model that matches the empirical findings, which demonstrates how creditor monitoring and covenants facilitate borrowing well beyond liquidation values.

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