Essay:

Claire A. Hill, Is Secured Debt Efficient?, 80 TEXAS L. REV. 1117 (2002).

Abstract:

In Is Secured Debt Efficient?, Professor Hill describes the results of an investigation she conducted into firms’ use of secured debt, during the course of which she interviewed over twenty experts in the field.  Her research suggests that secured debt is better explained on efficiency grounds, rather than externalization grounds, and thus casts doubt on the traditional justifications given for limiting the priority of secured debt in bankruptcy.  According Hill, a distinction is to be made between the financial behavior of lower-quality level firms and higher-quality level firms with regard to securing their assets.  In analyzing this distinction and the accompanying divergence in interests between firms and their lenders, Hill posits that the pattern of secured debt is more consistent with an efficiency account of secured debt than an account in which externalization of liabilities onto nonadjusting creditors plays an important role.