Real Asset Illiquidity and the Cost of Capital

55 Pages Posted: 4 Jun 2009 Last revised: 27 Aug 2012

See all articles by Hernan Ortiz-Molina

Hernan Ortiz-Molina

University of British Columbia (UBC) - Sauder School of Business

Gordon M. Phillips

Dartmouth College - Tuck School of Business; National Bureau of Economic Research (NBER)

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Date Written: August 25, 2012

Abstract

We show that firms with more illiquid real assets have a higher cost of capital. This effect is stronger when real illiquidity arises from lower within-industry acquisition activity. Real asset illiquidity increases the cost of capital more for firms that face more competition, have less access to external capital or are closer to default, and for those facing negative demand shocks. The effect of real asset illiquidity is distinct from that of firms’ stock illiquidity or systematic liquidity risk. These results suggest that real asset illiquidity reduces firms’ operating flexibility and through this channel its cost of capital.

Keywords: real asset illiquidity, cost of capital, operating inflexibility, financial flexibility

JEL Classification: G31, G32, G12

Suggested Citation

Ortiz-Molina, Hernan and Phillips, Gordon M., Real Asset Illiquidity and the Cost of Capital (August 25, 2012). Available at SSRN: https://ssrn.com/abstract=1413780 or http://dx.doi.org/10.2139/ssrn.1413780

Hernan Ortiz-Molina (Contact Author)

University of British Columbia (UBC) - Sauder School of Business ( email )

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Gordon M. Phillips

Dartmouth College - Tuck School of Business ( email )

Hanover, NH 03755
United States

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
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