Anatomy of Corporate Borrowing Constraints∗

A common perspective in macro-finance analyses links firms’ borrowing constraints to the liquidation value of physical assets firms pledge as collateral. We empirically investigate borrowing by non-financial firms in the US. We find that 20% of corporate debt by value is collateralized by specific physical assets (“asset-based lending” in creditor parlance), while 80% is based predominantly on cash flows from firms’ operations (“cash flow-based lending”). In this setting, a standard form of borrowing constraint restricts a firm’s total debt as a function of cash flows measured using operating earnings (“earnings-based borrowing constraints,” or EBCs). The features of corporate borrowing illuminate how financial variables affect firms’ borrowing constraints and outcomes on the margin. First, with cash flow-based lending, cash flows in the form of operating earnings directly relax EBCs, and enable firms to both borrow and invest more. Second, as corporate borrowing overall does not rely heavily on physical assets such as real estate, firms could be less vulnerable to collateral damage from asset price shocks, and fire sale amplifications may be mitigated. In the Great Recession, for example, property value declines did not trigger a deleveraging cycle among major US non-financial firms due to collateral damage. Finally, results in the US contrast with those in Japan, where corporate borrowing historically emphasizes physical assets. ∗We are grateful to Daron Acemoglu, Marios Angeletos, Ricardo Caballero, Emmanuel Farhi, Fritz Foley, Xavier Gabaix, Ed Glaeser, Dan Greenwald (discussant), Robin Greenwood, Sam Hanson, Bengt Holmstrom, Victoria Ivashina, Amir Kermani, James Poterba, David Scharfstein, Jose Scheinkman, Andrei Shleifer, Alp Simsek, Jeremy Stein, David Thesmar, Ivan Werning, Chunhui Yuan, Yao Zeng, conference participants at NBER Monetary Economics Meeting, and seminar participants at Columbia, Harvard, and MIT for very helpful suggestions. We are also thankful to finance and legal professionals Sarah Johnson, Christopher Mirick, Andrew Troop, Marc Zenner, and especially Kristin Mugford for sharing their knowledge. Please click here for the Internet Appendix. First draft: May 2017.