Asset Sales and Debt Capacity

Asset Sales and Debt Capacity

February 1991 | Andrei Shleifer, Robert W. Vishny
This paper explores the relationship between asset sales and debt capacity, arguing that liquid assets are better candidates for debt finance because financial distress for firms with such assets is relatively inexpensive. The authors apply this logic to explain variation in debt capacity across industries and over the business cycle, as well as the rise in U.S. corporate leverage in the 1980s. They focus on the cost of asset sales, particularly the liquidity cost, which is the difference between the net present value of an asset's cash flows in its best use and the price it fetches in a quick sale. The paper discusses the determinants of asset liquidity, including the fungibility of assets, participation and credit constraints of potential buyers, and the ability of deep pocket investors to purchase assets. The authors argue that asset liquidity changes over time, leading to changes in debt capacity, and that high markets tend to be liquid markets. They also provide implications for cross-sectional financing patterns and the structure of corporate debt and assets.This paper explores the relationship between asset sales and debt capacity, arguing that liquid assets are better candidates for debt finance because financial distress for firms with such assets is relatively inexpensive. The authors apply this logic to explain variation in debt capacity across industries and over the business cycle, as well as the rise in U.S. corporate leverage in the 1980s. They focus on the cost of asset sales, particularly the liquidity cost, which is the difference between the net present value of an asset's cash flows in its best use and the price it fetches in a quick sale. The paper discusses the determinants of asset liquidity, including the fungibility of assets, participation and credit constraints of potential buyers, and the ability of deep pocket investors to purchase assets. The authors argue that asset liquidity changes over time, leading to changes in debt capacity, and that high markets tend to be liquid markets. They also provide implications for cross-sectional financing patterns and the structure of corporate debt and assets.
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