Agency costs and the demand and supply of secured debt and asset securitization

Current accounts of the demand and supply of secured debt and asset securitization are in stark contrast with observed debtor behavior. This Article addresses the disconnects between current theories and observed practices by considering the effects of the agency costs associated with corporations and the risk-aversion associated with non-corporate forms of business enterprises on the demand for secured debt. Integrating agency costs and risk-aversion into the debtor decision between secured and unsecured debt suggests a strong bias against secured debt because free assets serve as a safety mechanism for managers similar to Jensen's theory with respect to free cash flow. An analysis of the supply of secured debt and asset securitization illustrates that a significant, if not primary, element of both species of financing is the radically different way in which secured debt and asset securitization attempt to decrease the likelihood of debtor insolvency.