Collateral, Risk, and Borrowing Capacity

We examine the effect of risk-shifting incentives on the relation between collateral and corporate borrowing capacity. The increase in gold prices during the 2008-2009 financial crisis provided a positive shock to the collateral value of gold firms, in contrast to the average firm that experienced a negative liquidity shock. Using a difference-in-differences framework, we find that gold firms have more borrowing capacity with credit lines during the crisis than non-gold firms. However, this effect manifests only in non-distressed firms and firms with secured credit lines, consistent with lenders supplying credit to firms least likely to engage in risk-shifting behavior.