Capital Structure and Assets: Effects of an Implicit Collateral

27 Pages Posted: 12 Mar 2008

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.

Suggested Citation

Flor, Christian Riis, Capital Structure and Assets: Effects of an Implicit Collateral. European Financial Management, Vol. 14, Issue 2, pp. 347-373, March 2008, Available at SSRN: https://ssrn.com/abstract=1104779 or http://dx.doi.org/10.1111/j.1468-036X.2007.00393.x

Christian Riis Flor (Contact Author)

University of Southern Denmark ( email )

Campusvej 55
Odense DK-5230
Denmark
+45 6550 3384 (Phone)
+45 6593 0726 (Fax)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
4
Abstract Views
655
PlumX Metrics