Collateral

Engineering

Microeconomics

Computer security

Creditor

Cash

Constraint (computer-aided design)

Economics

Computer science

Asset (computer security)

Mechanical engineering

Mathematics

Monetary economics

Value (mathematics)

Earnings

Budget constraint

Debt

Geometry

Cash flow forecasting

Cash flow

Point (geometry)

Operating cash flow

Finance

Margin (machine learning)

Machine learning

The Quarterly Journal of Economics

Macro-finance analyses commonly link firms’ borrowing constraints to the liquidation value of physical assets. For U.S. nonfinancial firms, we show that 20% of debt by value is based on such assets (asset-based lending in creditor parlance), whereas 80% is based predominantly on cash flows from firms’ operations (cash flow–based lending). A standard borrowing constraint restricts total debt as a function of cash flows measured using operating earnings (earnings-based borrowing constraints). These features shape firm outcomes on the margin: first, cash flows in the form of operating earnings can directly relax borrowing constraints; second, firms are less vulnerable to collateral damage from asset price declines, and fire sale amplification may be mitigated. Taken together, our findings point to new venues for modeling firms’ borrowing constraints in macro-finance studies.

Anatomy of Corporate Borrowing Constraints*