Real Assets and Capital Structure

Murillo Campello, Erasmo Giambona

NBER Working Paper No. 18147
Issued in June 2012
NBER Program(s):   CF

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.

download in pdf format
   (355 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w18147

Published: Campello, Murillo; Giambona, Erasmo. "Real Assets and Capital Structure" Journal of Financial and Quantitative Analysis 48.5 (2013): 1333-1370.

Users who downloaded this paper also downloaded these:
Rauh and Sufi w14488 Capital Structure and Debt Structure
Robb and Robinson w16272 The Capital Structure Decisions of New Firms
Fan, Titman, and Twite w16445 An International Comparison of Capital Structure and Debt Maturity Choices
Desai, Foley, and Hines w12276 Capital Structure with Risky Foreign Investment
Myers and Read w18148 Real Options, Taxes and Financial Leverage
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us