Asset Sales and Debt Capacity
NBER Working Paper No. 3618
In this paper, we explore the link between asset sales end debt capacity. Asset sales are a common way far firms to raise cash, and so present an alternative to security issues for firms near financial distress. We argue that liquid assets -- those that can be resold at attractive terms -- are good candidates for debt finance because financial distress for firms with such assets is relatively inexpensive. We apply this logic to explain variation in debt capacity across industries and over the business cycle, as well as to the rise in U.S. corporate leverage in the 1980s.
Published: Journal of Finance, Vol. 47, No. 4, September 1992,"Liquidation Values and Debt Capacity: A Market Equilibrium Approach"