Hostname: page-component-7b7567c8c-7pwfn Total loading time: 0 Render date: 2026-11-15T21:13:34.966Z Has data issue: false hasContentIssue false
  • English
  • Français

Asset Redeployability, Liquidation Value, and Endogenous Capital Structure Heterogeneity

Published online by Cambridge University Press:  22 August 2019

Antonio E. Bernardo,
Alex Fabisiak and
Ivo WelchOpen the ORCID record for Ivo Welch[Opens in a new window]
Antonio E. Bernardo
Affiliation:
Bernardo, antonio.bernardo@anderson.ucla.edu
Alex Fabisiak
Affiliation:
Fabisiak, alex.fabisiak.1@anderson.ucla.edu
Ivo Welch*
Affiliation:
Welch, ivo.welch@gmail.comUniversity of California at Los Angeles Anderson School of Management
*
Welch (corresponding author), ivo.welch@gmail.com
Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the 'Save PDF' action button.

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, with some choosing highly levered operations (to take advantage of ongoing debt benefits) and others choosing more conservative policies to wait for acquisition opportunities. Our key empirical implication is that the acquisition channel can induce firms to reduce debt when assets become more redeployable.

Information

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 55 , Issue 5 , August 2020, pp. 1619 - 1656
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2019

Footnotes

This article uses ideas from earlier abandoned working papers. We thank Sebastian Gryglewicz and Alexei Zhdanov (the referees), Jarrad Harford (the editor), and many commenters and seminar participants at University of California at Berkeley, Stanford University, University of Toronto, Boston University, UCLA, University of Oslo, and at the 2014 Conference on Creditors and Corporate Governance at the University of Chicago and the 2015 Western Finance Association conferences.

References

Acharya, V. V.; Bharath, S.; and Srinivasan, A.. “Does Industry-Wide Distress Affect Defaulted Firms? Evidence from Creditor Recoveries.” Journal of Financial Economics, 85 (2007), 787–821.CrossRefGoogle Scholar
Acharya, V. V., and Viswanathan, S.. “Leverage, Moral Hazard, and Liquidity.” Journal of Finance, 66 (2011), 99–138.CrossRefGoogle Scholar
Allen, F., and Gale, D.. “Limited Market Participation and Volatility of Asset Prices.” American Economic Review, 84 (1994), 933–955.Google Scholar
Asquith, P.; Gertner, R.; and Scharfstein, D.. “Anatomy of Financial Distress: An Examination of Junk-Bond Issuers.” Quarterly Journal of Economics, 109 (1994), 625–658.CrossRefGoogle Scholar
Benmelech, E., and Bergman, N. K.. “Liquidation Values and the Credibility of Financial Contract Renegotiation: Evidence from U.S. Airlines.” Quarterly Journal of Economics, 123 (2008), 1635–1677.CrossRefGoogle Scholar
Benmelech, E.; Garmaise, M. J.; and Moskowitz, T. J.. “Do Liquidation Values Affect Financial Contracts? Evidence from Commercial Loan Contracts and Zoning Regulation.” Quarterly Journal of Economics, 120 (2005), 1121–1154.Google Scholar
Bolton, P.; Santos, T.; and Scheinkman, J.. “Outside and Inside Liquidity.” Quarterly Journal of Economics, 126 (2011), 259–321.CrossRefGoogle Scholar
Bris, A.; Welch, I.; and Zhu, N.. “The Costs of Bankruptcy: Chapter 7 Liquidation versus Chapter 11 Reorganization.” Journal of Finance, 61 (2006), 1253–1303.CrossRefGoogle Scholar
Duffie, D.“Presidential Address: Asset Price Dynamics with Slow-Moving Capital.” Journal of Finance, 65 (2010), 1237–1267.CrossRefGoogle Scholar
Fries, S.; Miller, M.; and Perraudin, W.. “Debt in Industry Equilibrium.” Review of Financial Studies, 10 (1997), 39–67.CrossRefGoogle Scholar
Gale, D., and Gottardi, P.. “Bankruptcy, Finance Constraints, and the Value of the Firm.” American Economic Journal: Microeconomics, 3 (2011), 1–37.Google Scholar
Gale, D., and Gottardi, P.. “Capital Structure, Investment, and Fire Sales.” Review of Financial Studies, 28 (2015), 2502–2533.CrossRefGoogle Scholar
Gryglewicz, S.“A Theory of Corporate Financial Decisions with Liquidity and Solvency Concerns.” Journal of Financial Economics, 99 (2011), 365–384.CrossRefGoogle Scholar
Harris, M., and Raviv, A.. “Capital Structure and the Informational Role of Debt.” Journal of Finance, 45 (1990), 321–349.CrossRefGoogle Scholar
Jensen, M., and Meckling, W.. “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure.” Journal of Financial Economics, 4 (1976), 305–360.CrossRefGoogle Scholar
Leary, M. T., and Roberts, M. R.. “Do Peer Firms Affect Corporate Financial Policy?” Journal of Finance, 69 (2014), 139–178.CrossRefGoogle Scholar
Leland, H.“Corporate Debt Value, Bond Covenants, and Optimal Capital Structure.” Journal of Finance, 49 (1994), 1213–1252.CrossRefGoogle Scholar
Leland, H., and Toft, K. B.. “Optimal Capital Structure, Endogenous Bankruptcy, and the Term Structure of Credit Spreads.” Journal of Finance, 51 (1996), 987–1019.CrossRefGoogle Scholar
Maksimovic, V., and Zechner, J.. “Debt, Agency Costs, and Industry Equilibrium.” Journal of Finance, 46 (1991), 1619–1643.CrossRefGoogle Scholar
Marquez, R., and Yavuz, M. D.. “Specialization, Productivity, and Financing Constraints.” Review of Financial Studies, 26 (2013), 2961–2984.CrossRefGoogle Scholar
McDonald, R., and Siegel, D.. “The Value of Waiting to Invest.” Quarterly Journal of Economics, 101 (1986), 707–727.CrossRefGoogle Scholar
Miller, M. H.“Debt and Taxes.” Journal of Finance, 32 (1977), 261–275.Google Scholar
Morellec, E., and Zhdanov, A.. “Financing and Takeovers.” Journal of Financial Economics, 87 (2008), 556–581.CrossRefGoogle Scholar
Myers, S. C.“Determinants of Corporate Borrowing.” Journal of Financial Economics, 5 (1977), 147–175.CrossRefGoogle Scholar
Opler, T. C., and Titman, S.. “Financial Distress and Corporate Performance.” Journal of Finance, 49 (1994), 1015–1040.CrossRefGoogle Scholar
Pulvino, T.“Do Asset Fire Sales Exist? An Empirical Investigation of Commercial Aircraft Sale Transactions.” Journal of Finance, 53 (1998), 939–978.CrossRefGoogle Scholar
Rajan, R., and Ramcharan, R.. “Local Financial Capacity and Asset Values: Evidence from Bank Failures.” Journal of Financial Economics, 120 (2016), 229–251.CrossRefGoogle Scholar
Robichek, A. A., and Myers, S. C.. “Problems in the Theory of Optimal Capital Structure.” Journal of Financial and Quantitative Analysis, 1 (1966), 1–35.CrossRefGoogle Scholar
Shleifer, A., and Vishny, R.. “Liquidation Values and Debt Capacity: An Equilibrium Approach.” Journal of Finance, 47 (1992), 1343–1366.CrossRefGoogle Scholar
Titman, S.“The Effect of Capital Structure on a Firm’s Liquidation Decision.” Journal of Financial Economics, 13 (1984), 137–151.CrossRefGoogle Scholar
Williamson, O. E.“Corporate Finance and Corporate Governance.” Journal of Finance, 43 (1988), 567–592.CrossRefGoogle Scholar
Supplementary material: File

Bernardo et al. supplementary materials

Bernardo et al. supplementary materials

Download Bernardo et al. supplementary materials(File)
File 116.2 KB