[This article focuses on a key property of asset-backed securities (ABS); namely, that ABS are designed to achieve "bankruptcy remoteness" of securitized assets from the borrowing firm. This provides lenders with protection from dilution that is not available with contracts such as secured debt. ABS allows firms to commit to more efficient investment decisions in bankruptcy. Securitization of replaceable assets (such as receivables) prevents inefficient continuation, but securitization of necessary assets can produce ex-post inefficiency, which favors secured debt. We test a prediction of our model using the LTV Steel bankruptcy, in which bankruptcy remoteness was successfully challenged. We find that ABS spreads for Chapter 11—eligible securitizers increased significantly more than spreads for Chapter 11—ineligible securitizers following LTV.]

[This article adopts a definition of property rights from legal scholarship: A property right (in contrast to a contractual right) is enforceable, not only against the parties to a contract, but also against third parties outside the contract. In a financial contracting setting, we ask: When should the law enforce a lender's contractual protections as property rights, given that these rights may be hidden and costly for other lenders to discover? Our model explains why the law limits the creation and enforceability of property rights, and develops principles of optimal enforceability. These principles are often reflected in the law.]

This article focuses on a key property of asset-backed securities (ABS); namely, that ABS are designed to achieve “bankruptcy remoteness” of securitized assets from the borrowing firm. This provides lenders with protection from dilution that is not available with contracts such as secured debt. ABS allows firms to commit to more efficient investment decisions in bankruptcy. Securitization of replaceable assets (such as receivables) prevents inefficient continuation, but securitization of necessary assets can produce ex-post inefficiency, which favors secured debt. We test a prediction of our model using the LTV Steel bankruptcy, in which bankruptcy remoteness was successfully challenged. We find that ABS spreads for Chapter 11–eligible securitizers increased significantly more than spreads for Chapter 11–ineligible securitizers following LTV.

This article adopts a definition of property rights from legal scholarship: A property right (in contrast to a contractual right) is enforceable, not only against the parties to a contract, but also against third parties outside the contract. In a financial contracting setting, we ask: When should the law enforce a lender's contractual protections as property rights, given that these rights may be hidden and costly for other lenders to discover? Our model explains why the law limits the creation and enforceability of property rights, and develops principles of optimal enforceability. These principles are often reflected in the law.