Shleifer and Vishny (1992) examine the relationship between asset sales and debt capacity, arguing that liquid assets are better suited for debt financing because financial distress for firms with such assets is relatively inexpensive. They analyze how asset liquidity affects debt capacity across industries and over the business cycle, as well as the rise in U.S. corporate leverage in the 1980s. Asset sales are a common way for firms to raise cash, especially in financial distress, and can be more attractive than traditional financial restructuring methods like debt rescheduling, equity issuance, or obtaining fresh loans. However, asset sales can be costly due to liquidity constraints, particularly when buyers face credit constraints or are unable to pay the full value of the asset. The paper discusses three types of buyers: industry insiders, who can evaluate and manage assets more effectively, and deep pocket investors, who may have access to cheaper capital but lack the expertise to manage the assets. Fungible assets, which can be easily resold for their full value, are more liquid and thus better suited for debt financing. In contrast, non-fungible assets, such as oil tankers or machine tools, are less liquid and thus less suitable for debt financing. The liquidity of assets is also influenced by the cyclical nature of cash flows and the persistence of industry buyer participation. The authors argue that asset liquidity is a key determinant of debt capacity, with more liquid assets being better collateral. They also note that the debt capacity of firms is affected by the liquidity of their assets, with illiquid assets being less suitable for debt financing. The paper provides evidence that firms with more liquid assets are more likely to take on debt, and that the debt capacity of industries is influenced by the liquidity of their assets. The authors also discuss the implications of changes in liquidity over time, noting that high markets tend to be liquid markets, while low markets tend to be illiquid. The paper concludes that asset liquidity is a critical factor in determining debt capacity, and that firms with more liquid assets are better positioned to take on debt. The authors also note that the debt capacity of industries is influenced by the liquidity of their assets, with industries that have more liquid assets being able to take on more debt. The paper provides a framework for understanding the relationship between asset liquidity and debt capacity, and highlights the importance of liquidity in determining the ability of firms to take on debt.Shleifer and Vishny (1992) examine the relationship between asset sales and debt capacity, arguing that liquid assets are better suited for debt financing because financial distress for firms with such assets is relatively inexpensive. They analyze how asset liquidity affects debt capacity across industries and over the business cycle, as well as the rise in U.S. corporate leverage in the 1980s. Asset sales are a common way for firms to raise cash, especially in financial distress, and can be more attractive than traditional financial restructuring methods like debt rescheduling, equity issuance, or obtaining fresh loans. However, asset sales can be costly due to liquidity constraints, particularly when buyers face credit constraints or are unable to pay the full value of the asset. The paper discusses three types of buyers: industry insiders, who can evaluate and manage assets more effectively, and deep pocket investors, who may have access to cheaper capital but lack the expertise to manage the assets. Fungible assets, which can be easily resold for their full value, are more liquid and thus better suited for debt financing. In contrast, non-fungible assets, such as oil tankers or machine tools, are less liquid and thus less suitable for debt financing. The liquidity of assets is also influenced by the cyclical nature of cash flows and the persistence of industry buyer participation. The authors argue that asset liquidity is a key determinant of debt capacity, with more liquid assets being better collateral. They also note that the debt capacity of firms is affected by the liquidity of their assets, with illiquid assets being less suitable for debt financing. The paper provides evidence that firms with more liquid assets are more likely to take on debt, and that the debt capacity of industries is influenced by the liquidity of their assets. The authors also discuss the implications of changes in liquidity over time, noting that high markets tend to be liquid markets, while low markets tend to be illiquid. The paper concludes that asset liquidity is a critical factor in determining debt capacity, and that firms with more liquid assets are better positioned to take on debt. The authors also note that the debt capacity of industries is influenced by the liquidity of their assets, with industries that have more liquid assets being able to take on more debt. The paper provides a framework for understanding the relationship between asset liquidity and debt capacity, and highlights the importance of liquidity in determining the ability of firms to take on debt.