Real Assets and Capital Structure

51 Pages Posted: 16 Jun 2012 Last revised: 26 Jun 2012

See all articles by Murillo Campello

Murillo Campello

Cornell University - Samuel Curtis Johnson Graduate School of Management; National Bureau of Economic Research (NBER)

Erasmo Giambona

Syracuse University - Whitman School of Management - Finance Department; James D. Kuhn Center for Real Estate

Date Written: June 2012

Abstract

We characterize the relation between asset structure and capital structure by exploiting variation in the salability of corporate assets. Theory suggests that asset tangibility increases borrowing capacity because it allows creditors to more easily repossess a firm's assets. Tangible assets, however, are often illiquid. We show that the redeployability of tangible assets is a main determinant of corporate leverage --- beyond standard proxies for tangibility. To establish this link, we distinguish across different asset categories in firms' balance sheets (e.g., machinery, land and buildings) and use an instrumental approach that incorporates measures of supply and demand for those individual assets. We also use a natural experiment driving differential increases in the supply of real estate assets in some regions of the country: The Defense Base Closure and Realignment Act of 1990. Consistent with a credit supply-side view of capital structure, we find that asset redeployability is a particularly important driver of leverage for firms that are likely to face credit frictions (e.g., small, unrated firms). Our tests also show that asset redeployability facilitates borrowing the most during periods of tight credit in the economy. Our work contributes new evidence to capital structure models that are based on contract incompleteness and limited enforceability. It does so characterizing a well-defined channel through which credit frictions affect firm financial decisions.

Suggested Citation

Campello, Murillo and Giambona, Erasmo, Real Assets and Capital Structure (June 2012). NBER Working Paper No. w18147. Available at SSRN: https://ssrn.com/abstract=2085134

Murillo Campello (Contact Author)

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

114 East Avenue
369 Sage Hall
Ithaca, NY 14853
United States

HOME PAGE: http://www.johnson.cornell.edu/Faculty-And-Research/Profile.aspx?id=mnc35

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138

Erasmo Giambona

Syracuse University - Whitman School of Management - Finance Department; James D. Kuhn Center for Real Estate ( email )

721 University Avenue
RM 120-D
Syracuse, NY 13244-2450
United States
315 443-4885 (Phone)

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