Asset Tangibility and Firm Performance Under External Financing: Evidence from Product Markets

41 Pages Posted: 21 Mar 2007

See all articles by Murillo Campello

Murillo Campello

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

Date Written: March 14, 2007

Abstract

I examine the impact of contract enforceability on corporate performance. My tests sidestep the issue of endogeneity between contracting and economic outcomes using "asset tangibility" (i.e., the resale value or ease of redeployment of corporate assets) as an instrument. Because asset tangibility changes over time for reasons that are outside of the control of firms and financiers (e.g., industry demand for second-hand assets), it can be used to identify a causal link between financing and performance. The identification works along the lines of a moral hazard argument: when asset tangibility is high managers have heightened incentives to perform since firm liquidation/reorganization becomes a more credible threat. I find evidence that the ex post resale value and redeployability of corporate assets drive the relative performance of firms that rely more heavily on external financing for their investment. Specifically, I show that the component of investment that is explained by external financing is associated with superior (inferior) relative-to-rival product market performance, capital market valuation, and accounting returns when asset tangibility turns out to be high (low) after the firm raises financing. Crucially, these sorts of tangibility-driven dynamics are not observed for internally-funded investment (when contract enforceability is irrelevant), and obtain despite the fact that asset tangibility does not unconditionally forecast firm performance. The effect of asset tangibility on investment performance under external financing is magnified when firms are near distress.

Keywords: Product markets, asset tangibility, external financing, moral hazard, endogeneity

JEL Classification: G31

Suggested Citation

Campello, Murillo, Asset Tangibility and Firm Performance Under External Financing: Evidence from Product Markets (March 14, 2007). Available at SSRN: https://ssrn.com/abstract=971170 or http://dx.doi.org/10.2139/ssrn.971170

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

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