Advanced Search
MyIDEAS: Login to save this paper or follow this series

Capital Structure and the Redeployability of Tangible Assets

Contents:

Author Info

  • Murillo Campello

    (University of Illinois and NBER)

  • Erasmo Giambona

    (University of Amsterdam and Duisenberg school of finance)

Registered author(s):

    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.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://papers.tinbergen.nl/11091.pdf
    Download Restriction: no

    Bibliographic Info

    Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 11-091/2/DSF24.

    as in new window
    Length:
    Date of creation: 07 Jul 2011
    Date of revision:
    Handle: RePEc:dgr:uvatin:20110091

    Contact details of provider:
    Web page: http://www.tinbergen.nl

    Related research

    Keywords: Asset tangibility; redeployability; capital structure; credit frictions; instrumental variables; asset demand;

    Find related papers by JEL classification:

    This paper has been announced in the following NEP Reports:

    References

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
    as in new window
    1. Myers, Stewart C, 1984. " The Capital Structure Puzzle," Journal of Finance, American Finance Association, American Finance Association, vol. 39(3), pages 575-92, July.
    2. Mitchell A. Petersen, 2009. "Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 22(1), pages 435-480, January.
    3. Gertler, M. & Gilchrist, S., 1992. "Monetary Policy, Business Cycles and the Behavior of Small Manufacturing Firms," Working Papers, C.V. Starr Center for Applied Economics, New York University 92-08, C.V. Starr Center for Applied Economics, New York University.
    4. Acharya, Viral V. & Bharath, Sreedhar T. & Srinivasan, Anand, 2007. "Does industry-wide distress affect defaulted firms? Evidence from creditor recoveries," Journal of Financial Economics, Elsevier, Elsevier, vol. 85(3), pages 787-821, September.
    5. Peter MacKay & Gordon M. Phillips, 2005. "How Does Industry Affect Firm Financial Structure?," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 18(4), pages 1433-1466.
    6. Campello, Murillo, 2006. "Debt financing: Does it boost or hurt firm performance in product markets?," Journal of Financial Economics, Elsevier, Elsevier, vol. 82(1), pages 135-172, October.
    7. Ben-Shahar, Danny, 1998. "On the Optimality of the Hybrid Tenure Mode," Journal of Housing Economics, Elsevier, Elsevier, vol. 7(1), pages 69-92, March.
    8. Eugene F. Fama & Kenneth R. French, . "Testing Tradeoff and Pecking Order Predictions about Dividends and Debt.”," CRSP working papers, Center for Research in Security Prices, Graduate School of Business, University of Chicago 506, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
    9. Todd Sinai & Nicholas S. Souleles, 2005. "Owner-Occupied Housing as a Hedge Against Rent Risk," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 120(2), pages 763-789, May.
    10. Rampini, Adriano A. & Viswanathan, S., 2013. "Collateral and capital structure," Journal of Financial Economics, Elsevier, Elsevier, vol. 109(2), pages 466-492.
    11. Simon Gilchrist & Charles P. Himmelberg, 1995. "Evidence on the Role of Cash Flow for Investment," Working Papers, New York University, Leonard N. Stern School of Business, Department of Economics 95-01, New York University, Leonard N. Stern School of Business, Department of Economics.
    12. Shleifer, Andrei & Vishny, Robert W, 1992. " Liquidation Values and Debt Capacity: A Market Equilibrium Approach," Journal of Finance, American Finance Association, American Finance Association, vol. 47(4), pages 1343-66, September.
    13. Efraim Benmelech & Mark J. Garmaise & Tobias J. Moskowitz, 2005. "Do Liquidation Values Affect Financial Contracts? Evidence from Commercial Loan Contracts and Zoning Regulation," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 120(3), pages 1121-1154, August.
    14. Christopher F Baum & Mark E. Schaffer & Steven Stillman, 2003. "Instrumental variables and GMM: Estimation and testing," Stata Journal, StataCorp LP, StataCorp LP, vol. 3(1), pages 1-31, March.
    15. Kleibergen, Frank & Paap, Richard, 2006. "Generalized reduced rank tests using the singular value decomposition," Journal of Econometrics, Elsevier, Elsevier, vol. 133(1), pages 97-126, July.
    16. Ortalo-Magne, Francois & Rady, Sven, 2002. "Tenure choice and the riskiness of non-housing consumption," Journal of Housing Economics, Elsevier, Elsevier, vol. 11(3), pages 266-279, September.
    17. Stephen Malpezzi & Richard K. Green, 1995. "What’s Happened to the Bottom of the Housing Market?," Wisconsin-Madison CULER working papers, University of Wisconsin Center for Urban Land Economic Research 95-16, University of Wisconsin Center for Urban Land Economic Research.
    18. Efraim Benmelech, 2009. "Asset Salability and Debt Maturity: Evidence from Nineteenth-Century American Railroads," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 22(4), pages 1545-1584, April.
    19. Oliver Hart & John Moore, 1991. "A Theory of Debt Based on the Inalienability of Human Capital," STICERD - Theoretical Economics Paper Series, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE /1991/233, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
    20. Mark T. Leary, 2009. "Bank Loan Supply, Lender Choice, and Corporate Capital Structure," Journal of Finance, American Finance Association, American Finance Association, vol. 64(3), pages 1143-1185, 06.
    21. Ben S. Bernanke & Mark Gertler, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," NBER Working Papers 5146, National Bureau of Economic Research, Inc.
    22. Michael L. Lemmon & Michael R. Roberts & Jaime F. Zender, 2008. "Back to the Beginning: Persistence and the Cross-Section of Corporate Capital Structure," Journal of Finance, American Finance Association, American Finance Association, vol. 63(4), pages 1575-1608, 08.
    23. Mark J. Garmaise, 2008. "Production in Entrepreneurial Firms: The Effects of Financial Constraints on Labor and Capital," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 21(2), pages 543-577, April.
    24. Jeremy C. Stein & Anil K. Kashyap, 2000. "What Do a Million Observations on Banks Say about the Transmission of Monetary Policy?," American Economic Review, American Economic Association, American Economic Association, vol. 90(3), pages 407-428, June.
    25. James H. Stock & Motohiro Yogo, 2002. "Testing for Weak Instruments in Linear IV Regression," NBER Technical Working Papers, National Bureau of Economic Research, Inc 0284, National Bureau of Economic Research, Inc.
    26. Malcolm Baker & Jeffrey Wurgler, 2002. "Market Timing and Capital Structure," Journal of Finance, American Finance Association, American Finance Association, vol. 57(1), pages 1-32, 02.
    27. Williams, Joseph T, 1995. "Financial and Industrial Structure with Agency," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 8(2), pages 431-74.
    28. Steven M. Fazzari & R. Glenn Hubbard & BRUCE C. PETERSEN, 1988. "Financing Constraints and Corporate Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 141-206.
    29. Robert E. Carpenter & Steven M. Fazzari & Bruce C. Petersen, 1994. "Inventory Investment, Internal-Finance Fluctuation, and the Business Cycle," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 25(2), pages 75-138.
    30. Flannery, Mark J. & Rangan, Kasturi P., 2006. "Partial adjustment toward target capital structures," Journal of Financial Economics, Elsevier, Elsevier, vol. 79(3), pages 469-506, March.
    31. Heitor Almeida & Murillo Campello, 2007. "Financial Constraints, Asset Tangibility, and Corporate Investment," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 20(5), pages 1429-1460, 2007 12.
    32. John Shea, 1997. "Instrument Relevance in Multivariate Linear Models: A Simple Measure," The Review of Economics and Statistics, MIT Press, vol. 79(2), pages 348-352, May.
    33. Barclay, Michael J & Smith, Clifford W, Jr, 1995. " The Maturity Structure of Corporate Debt," Journal of Finance, American Finance Association, American Finance Association, vol. 50(2), pages 609-31, June.
    34. Harvey S. Rosen & Kenneth T. Rosen & Douglas Holtz-Eakin, 1983. "Housing Tenure, Uncertainty, and Taxation," NBER Working Papers 1168, National Bureau of Economic Research, Inc.
    35. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, Elsevier, vol. 5(2), pages 147-175, November.
    36. Gavazza, Alessandro, 2010. "The role of trading frictions in real asset markets," MPRA Paper 25781, University Library of Munich, Germany.
    37. Heitor Almeida & Murillo Campello & Michael S. Weisbach, 2004. "The Cash Flow Sensitivity of Cash," Journal of Finance, American Finance Association, American Finance Association, vol. 59(4), pages 1777-1804, 08.
    38. Holmstrom, Bengt & Tirole, Jean, 1997. "Financial Intermediation, Loanable Funds, and the Real Sector," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 112(3), pages 663-91, August.
    39. David J. Denis & Diane K. Denis & Keven Yost, 2002. "Global Diversification, Industrial Diversification, and Firm Value," Journal of Finance, American Finance Association, American Finance Association, vol. 57(5), pages 1951-1979, October.
    40. Heitor Almeida & Murillo Campello, 2006. "Financial Constraints, Asset Tangibility, and Corporate Investment," NBER Working Papers 12087, National Bureau of Economic Research, Inc.
    41. Raghuram G. Rajan & Luigi Zingales, 1994. "What Do We Know About Capital Structure? Some Evidence from International Data," NBER Working Papers 4875, National Bureau of Economic Research, Inc.
    42. Myers, Stewart C., 1984. "Capital structure puzzle," Working papers, Massachusetts Institute of Technology (MIT), Sloan School of Management 1548-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    43. Hernán Ortiz-Molina & Gordon M. Phillips, 2010. "Asset Liquidity and the Cost of Capital," NBER Working Papers 15992, National Bureau of Economic Research, Inc.
    44. Michael Faulkender & Mitchell A. Petersen, 2006. "Does the Source of Capital Affect Capital Structure?," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 19(1), pages 45-79.
    45. Chan, Su Han & Erickson, John & Wang, Ko, 2002. "Real Estate Investment Trusts: Structure: Structure, Performance, and Investment Opportunities," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780195155341, October.
    46. Efraim Benmelech & Nittai K. Bergman, 2008. "Collateral Pricing," NBER Working Papers 13874, National Bureau of Economic Research, Inc.
    47. Korajczyk, Robert A. & Levy, Amnon, 2003. "Capital structure choice: macroeconomic conditions and financial constraints," Journal of Financial Economics, Elsevier, Elsevier, vol. 68(1), pages 75-109, April.
    48. Sibilkov, Valeriy, 2009. "Asset Liquidity and Capital Structure," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 44(05), pages 1173-1196, October.
    49. Maksimovic, Vojislav & Zechner, Josef, 1991. " Debt, Agency Costs, and Industry Equilibrium," Journal of Finance, American Finance Association, American Finance Association, vol. 46(5), pages 1619-43, December.
    50. Stewart C. Myers, 1984. "Capital Structure Puzzle," NBER Working Papers 1393, National Bureau of Economic Research, Inc.
    51. Berger, Philip G. & Ofek, Eli & Swary, Itzhak, 1996. "Investor valuation of the abandonment option," Journal of Financial Economics, Elsevier, Elsevier, vol. 42(2), pages 257-287, October.
    52. Lemmon, Michael & Roberts, Michael R., 2010. "The Response of Corporate Financing and Investment to Changes in the Supply of Credit," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 45(03), pages 555-587, June.
    53. Frank, Murray Z. & Goyal, Vidhan K., 2003. "Testing the pecking order theory of capital structure," Journal of Financial Economics, Elsevier, Elsevier, vol. 67(2), pages 217-248, February.
    54. Gao, Wenlian & Ng, Lilian & Wang, Qinghai, 2008. "Does geographic dispersion affect firm valuation?," Journal of Corporate Finance, Elsevier, Elsevier, vol. 14(5), pages 674-687, December.
    55. Schlingemann, Frederik P. & Stulz, Rene M. & Walkling, Ralph A., 2002. "Divestitures and the liquidity of the market for corporate assets," Journal of Financial Economics, Elsevier, Elsevier, vol. 64(1), pages 117-144, April.
    Full references (including those not matched with items on IDEAS)

    Citations

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:dgr:uvatin:20110091. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Antoine Maartens (+31 626 - 160 892)).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.