Raghuram G. Rajan, Eric J. Gleacher Distinguished Service Professor of Finance
Summary: We have collected data since the 1920s, which suggests a secular decline in the use of bonds secured by assets in the United States. This pattern does not just exist because of a change in sectoral composition of issuers, but even within manufacturing, and even for the same firm. We would like to (i) put this fact on firmer footing (ii) understand why it has happened.
The main candidate explanations might be (i) learning about the costs and benefits of secured debt, especially during the Depression (ii) substitution of other forms of debt for secured debt - bank loans and leases would be good candidates (iii) changes in bankruptcy law (iv) changes in institutional willingness to hold unsecured bonds (v) change in the attitudes of rating agencies towards them (vi) change in the liquidity of the underlying assets (vii) changes in attractiveness of debt (lower debt may mean less need for secured assets). We will work our way through these explanations, some of which are not mutually exclusive.