Working Paper: NBER ID: w15992
Authors: Hernn Ortiz-Molina; Gordon M. Phillips
Abstract: We study the effect of real asset liquidity on a firm's cost of capital. We find an aggregate asset-liquidity discount in firms' cost of capital that is strongly counter-cyclical. At the firm-level we find that asset liquidity affects firms' cost of capital both in the cross section and in the time series: Firms in industries with more liquid assets and during periods of high asset liquidity have lower cost of capital. This effect is stronger when the asset liquidity is provided by firms operating within the industry. We also find that higher asset liquidity reduces the cost of capital by more for firms that face more competitive risk in product markets, have less access to external capital or are closer to default, and for those facing negative demand shocks. Our results suggest that asset liquidity is valuable to firms and, more generally, that operating inflexibility is an economically important source of risk.
Keywords: Asset Liquidity; Cost of Capital; Financial Flexibility
JEL Codes: G12; G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Asset Liquidity (G19) | Cost of Capital (G31) |
| Higher Asset Liquidity (G19) | Lower Cost of Capital (G31) |
| Asset Liquidity Provided by Industry Firms (G32) | Cost of Capital (G31) |
| Asset Liquidity (G19) | Cost of Capital in Economic Downturns (G31) |
| Competitive Risks (L19) | Cost of Capital Reduction by Asset Liquidity (G32) |
| Limited Access to External Capital (O16) | Cost of Capital Reduction by Asset Liquidity (G32) |
| Proximity to Default (G33) | Cost of Capital Reduction by Asset Liquidity (G32) |