How Does Access to the Unsecured Debt Market Affect Investment?

This paper examines the relation between debt structure and investment, by exploiting differences in secured and unsecured debt holdings. In order to address endogeneity concerns, I exploit two sources of exogenous variation for identification. From the firms' side, the Jobs and Growth Tax Relief Reconciliation Act of 2003 represents a negative shock to firms' creditworthiness. From the credit market's perspective, the asset-backed commercial paper market collapse of 2007 caused a temporary shortage of unsecured commercial paper. Each of these shocks to debt structure is analyzed combining a difference-in-differences approach with an instrumental variable estimation (Waldinger (2010)), which allows studying i) substitution patterns among debt types and ii) the impact on investment. Results show that greater access to unsecured debt leads to larger investment. When firms face more restricted access to the unsecured debt market, they substitute toward secured debt, and reduce investment. The reason behind this result is that unsecured debt is more cost-effective in terms of spreads and covenants. These findings suggest that collateral is not key to finance investment, as instead has often been claimed in the literature. Creditworthiness rather than collateral is key to access unsecured debt. Additionally, I shed light on how access to the unsecured debt market relates to the balance sheet and credit channels of monetary policy.