Asset Tangibility and Capital Allocation

Posted: 30 Nov 2007

See all articles by Diemo Dietrich

Diemo Dietrich

Newcastle University Business School

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.

Keywords: Internal capital markets, Incomplete contracts, Asset tangibility

JEL Classification: G31, D82, M41, M44

Suggested Citation

Dietrich, Diemo, Asset Tangibility and Capital Allocation. Journal of Corporate Finance, Vol. 13, No. 5, 2007, Available at SSRN: https://ssrn.com/abstract=1036081

Diemo Dietrich (Contact Author)

Newcastle University Business School ( email )

5 Barrack Road
Newcastle-upon-Tyne NE1 7RU, NE1 4SE
United Kingdom

HOME PAGE: http://www.ncl.ac.uk/business-school/staff/profile/diemodietrich.html

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