The Effects of Asset Liquidity: Evidence from the Contract Drilling Industry
Chyhe E. Kim
University of Chicago
Journal of Financial Intermediation, Vol. 7, Issue 2
I use both the depth of the buyers' market and trading volume to measure asset liquidity in the contract drilling industry and find that drilling rigs were less liquid than oil wells. The results indicate that managers avoid selling illiquid assets unless they face high cost alternative sources of funds. The evidence also suggests that managers follow a "pecking order" of asset sales, selling liquid assets before illiquid assets. Finally, I find evidence that the liquidity of a firm's asset portfolio increases its debt capacity. I conclude that asset liquidity is an important consideration in investment and capital structure decisions.
JEL Classification: D51, D92, G20, G21Accepted Paper Series
Date posted: August 14, 1998
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