Secured Debt and Corporate Performance:

Agency theory in modern corporate finance suggests the presence of a conflict of interest between managers and shareholders. Prior theoretical and empirical research has identified leverage as an important mechanism that is likely to mitigate agency costs. Although debt plays a central role in mitigating corporate agency conflicts, relatively few studies have examined the implications that arise from the use of secured versus unsecured debt. Given the differences that exist in the incentives to engage in costly monitoring activities between secured and unsecured debt holders, we explore the role of secured and unsecured debt as monitoring devices. Specifically, we answer the following question: Does the use of unsecured debt result in a performance difference between firms that employ a higher proportion of unsecured debt versus firms that utilize secured debt? We find robust evidence that an increase in the use of secured debt by REITs is associated with positive excess returns in the following quarter.