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Asset tangibility and capital allocation

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  • Dietrich, Diemo

Abstract

Firms comprise divisions that often differ with respect to the degree of asset tangibility. As the strength of borrowing constraints depends on the liquidation value of assets, these firms influence their debt capacity by allocating funds across divisions. We argue that a company whose capital allocation is not verifiable suffers from a dynamic inconsistency problem, as it tends to allocate resources in favor of divisions with fewer tangible assets, leading to a tight borrowing constraint. When capital allocation is verifiable, committing to invest only little there eases this constraint, although it implies a deviation from a return maximizing allocation.

Suggested Citation

  • Dietrich, Diemo, 2007. "Asset tangibility and capital allocation," Journal of Corporate Finance, Elsevier, vol. 13(5), pages 995-1007, December.
  • Handle: RePEc:eee:corfin:v:13:y:2007:i:5:p:995-1007
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    Cited by:

    1. Diemo Dietrich & Uwe Vollmer, 2010. "International Banking and Liquidity Allocation," Journal of Financial Services Research, Springer;Western Finance Association, vol. 37(1), pages 45-69, February.
    2. Sorin Domnisoru & Sorin Vinatoru, 2008. "The Financial Audit Complexity of The Fixed Assets," European Research Studies Journal, European Research Studies Journal, vol. 0(4), pages 49-62.
    3. Dietrich, Diemo & Jindra, Björn, 2010. "Corporate governance in the multinational enterprise: A financial contracting perspective," International Business Review, Elsevier, vol. 19(5), pages 446-456, October.
    4. repec:zbw:iwhdps:18-06 is not listed on IDEAS
    5. Diemo Dietrich & Tobias Knedlik & Axel Lindner, 2011. "Central and Eastern European countries in the global financial crisis: a typical twin crisis?," Post-Communist Economies, Taylor & Francis Journals, vol. 23(4), pages 415-432, April.
    6. Dietrich, Diemo & Hauck, Achim, 2014. "Bank capital regulation, loan contracts, and corporate investment," The Quarterly Review of Economics and Finance, Elsevier, vol. 54(2), pages 230-241.

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