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Real Assets and Capital Structure

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  • 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.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18147.

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Date of creation: Jun 2012
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Handle: RePEc:nbr:nberwo:18147

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Cited by:
  1. ELKEMALI, Taoufik & BEN REJEB, Aymen & MATOUSSI, Hamadi, 2013. "R&D Intensity and Financing Decisions: Evidence from European Firms," MPRA Paper 52059, University Library of Munich, Germany, revised 15 Oct 2013.
  2. Drobetz, Wolfgang & Gounopoulos, Dimitrios & Merikas, Andreas & Schröder, Henning, 2013. "Capital structure decisions of globally-listed shipping companies," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 52(C), pages 49-76.
  3. Arping, Stefan, 2014. "Credit protection and lending relationships," Journal of Financial Stability, Elsevier, vol. 10(C), pages 7-19.
  4. Oscar Arce & Jose Manuel Campa & Angel Gavilan, 2012. "Macroeconomic Adjustment under Loose Financing Conditions in the Construction Sector," Working Papers 1226, BBVA Bank, Economic Research Department.

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