Working Paper: NBER ID: w18147
Authors: Murillo Campello; Erasmo Giambona
Abstract: We characterize the relation between asset structure and capital structure by exploiting variation in the salability of corporate assets. Theory suggests that asset tangibility increases borrowing capacity 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 determinant of corporate leverage --- beyond standard proxies for tangibility. To establish this link, we distinguish across different asset categories in firms' balance sheets (e.g., machinery, land and buildings) and use an instrumental approach that incorporates measures of supply and demand for those individual assets. We also use a natural experiment driving differential increases in the supply of real estate assets in some regions of the country: The Defense Base Closure and Realignment Act of 1990. Consistent with a credit supply-side view of capital structure, we find that asset redeployability is a particularly important driver of leverage for firms that are likely to face credit frictions (e.g., small, unrated firms). Our tests also show that asset redeployability facilitates borrowing the most during periods of tight credit in the economy. Our work contributes new evidence to capital structure models that are based on contract incompleteness and limited enforceability. It does so characterizing a well-defined channel through which credit frictions affect firm financial decisions.
Keywords: capital structure; asset tangibility; redeployability; credit frictions
JEL Codes: G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| asset redeployability (F35) | corporate leverage (G32) |
| asset redeployability (F35) | corporate leverage during tight credit (G32) |
| land and buildings (R33) | corporate leverage (G32) |
| machinery and equipment (L64) | corporate leverage (G32) |
| credit frictions (E51) | asset redeployability impact on leverage (G32) |
| asset redeployability (F35) | borrowing capacities (F34) |
| small unrated firms (G24) | asset redeployability impact on leverage (G32) |
| large rated firms (L25) | asset redeployability impact on leverage (G32) |