Template-Type: ReDIF-Paper 1.0
Series: Tinbergen Institute Discussion Papers
Creation-Date: 2011-07-07
Number: 11-091/2/DSF24
Author-Name: Murillo Campello
Author-Workplace-Name: University of Illinois and NBER
Author-Name: Erasmo Giambona
Author-Workplace-Name: University of Amsterdam and Duisenberg school of finance
Title: Capital Structure and the Redeployability of Tangible Assets
Abstract: We characterize the relation between corporate asset structure and capital structure by exploitingvariation in the salability of tangible assets. Theory suggests that tangibility increases borrowingcapacity because it allows creditors to more easily repossess a firm’s assets. Tangible assets, however,are often illiquid. We show that the redeployability of tangible assets is a main determinantof corporate leverage. To establish this link, our analysis uses an instrumental variables approachthat incorporates measures of supply and demand for various types of tangible assets (e.g., machines,land, and buildings). Consistent with a credit supply-side view of capital structure, we find that assetredeployability is a particularly important driver of leverage for firms that are likely to face creditfrictions (small, unrated firms). Our tests also show that asset redeployability facilitates borrowingthe most during periods of tight credit. Our work contributes new evidence to capital structure modelsthat are based on contract incompleteness and limited enforceability. It does so characterizing awell-defined channel through which credit frictions affect firm financial decisions.
Classification-JEL: G32
Keywords: Asset tangibility, redeployability, capital structure, credit frictions, instrumental variables, asset demand
File-Url: https://papers.tinbergen.nl/11091.pdf
File-Format: application/pdf
File-Size: 482250 bytes
Handle: RePEc:tin:wpaper:20110091