The Value of Financial Flexibility: Equilibrium Liquidation Values and Endogenous Capital Structure Heterogeneity

58 Pages Posted: 12 Dec 2016

See all articles by Antonio E. Bernardo

Antonio E. Bernardo

University of California, Los Angeles (UCLA) - Finance Area

Alex Fabisiak

University of California, Los Angeles (UCLA) - Anderson School of Management

Ivo Welch

University of California, Los Angeles (UCLA); National Bureau of Economic Research (NBER)

Date Written: December 9, 2016

Abstract

Firms with lower leverage are not only less likely to experience financial distress but are also better positioned to acquire assets from other distressed firms. With endogenous asset sales and values, each firm’s debt choice then depends on the choices of its industry peers. With indivisible assets, otherwise identical firms may adopt different debt policies — some choosing highly levered operations (e.g., to take advantage of tax benefits), others choosing more conservative policies to wait for acquisition opportunities. Moreover, the acquisition channel induces firms to reduce debt when assets become more redeployable. Finally, our paper highlights a simple pitfall: theoretical implications for debt do not always map into empirically measured implications for debt-to-value ratios, because value is also endogenous.

Keywords: Capital Structure Theory

JEL Classification: G32

Suggested Citation

Bernardo, Antonio E. and Fabisiak, Alex and Welch, Ivo, The Value of Financial Flexibility: Equilibrium Liquidation Values and Endogenous Capital Structure Heterogeneity (December 9, 2016). Available at SSRN: https://ssrn.com/abstract=2883286 or http://dx.doi.org/10.2139/ssrn.2883286

Antonio E. Bernardo

University of California, Los Angeles (UCLA) - Finance Area ( email )

Los Angeles, CA 90095-1481
United States
310-825-2198 (Phone)
310-206-5455 (Fax)

Alex Fabisiak

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

Ivo Welch (Contact Author)

University of California, Los Angeles (UCLA) ( email )

110 Westwood Plaza
C519
Los Angeles, CA 90095-1481
United States
310-825-2508 (Phone)

HOME PAGE: http://www.ivo-welch.info

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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