1986 Articles

A Relational Theory of Secured Financing

Scott, Robert E.

This Article develops a theory of secured financing that posits a debtor-creditor relationship much more complex and refractory than that conceived by conventional analysis. This paradigmatic relationship forms whenever privately issued debt is used to finance a firm's growth opportunities or financial "prospects." Because peculiar stresses may undermine the efforts of both debtor and creditor to exploit such prospects fully, the parties will predictably agree in the credit contract to forego any actions that threaten the relationship. But the manifestations of self-interested behavior are difficult to anticipate, and their interaction with other variables is often complex and unpredictable. In such an environment, the parties frequently are unable to achieve their mutually beneficial objectives through conventional contractual arrangements. Thus, the impetus for secured financing derives from the financing relationship itself and from the parties' desire to exploit it fully. Part I of the Article develops a conceptual analysis of the key determinants of relational financing. Part II tests the predictions of the relational theory against the available evidence of how these credit markets actually function. Finally, Part III uses this relational model of secured financing to evaluate the peculiar legal regime embodied in Article 9 of the Code.