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Capital Structure and Assets: Effects of an Implicit Collateral

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  • Christian Riis Flor

Abstract

"This paper analyses a firm's capital structure choice when assets have outside value. Valuable assets implicitly provide a collateral and increase tax shield exploitation. The key feature in this paper is asset value uncertainty, implying that it is unknown ex ante whether the equity holders ex post optimally sell the assets or re-optimise the capital structure. Ex ante, more uncertain asset value decreases leverage, but not firm value, and selling the assets becomes less likely. Firms should tend to invest in assets whose value is less correlated to changes in earnings and, in addition, asset sales are less likely when this correlation is low." Copyright 2007 The Author Journal compilation (c) 2007 Blackwell Publishing Ltd.

Suggested Citation

  • Christian Riis Flor, 2008. "Capital Structure and Assets: Effects of an Implicit Collateral," European Financial Management, European Financial Management Association, vol. 14(2), pages 347-373.
  • Handle: RePEc:bla:eufman:v:14:y:2008:i:2:p:347-373
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    File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1468-036X.2007.00393.x
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    Cited by:

    1. repec:spr:scient:v:102:y:2015:i:3:d:10.1007_s11192-014-1495-0 is not listed on IDEAS
    2. Christensen, Peter Ove & Flor, Christian Riis & Lando, David & Miltersen, Kristian R., 2014. "Dynamic capital structure with callable debt and debt renegotiations," Journal of Corporate Finance, Elsevier, vol. 29(C), pages 644-661.
    3. Sarkar, Sudipto & Zhang, Chuanqian, 2015. "Underinvestment and the design of performance-sensitive debt," International Review of Economics & Finance, Elsevier, vol. 37(C), pages 240-253.
    4. Vivake Anand & Kamran Ahmed Soomro & Suneel Kumar Solanki, 2016. "Determinants of Credit Rating and Optimal Capital Structure among Pakistani Banks," Romanian Economic Journal, Department of International Business and Economics from the Academy of Economic Studies Bucharest, vol. 19(60), pages 169-182, June.

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