Asset Tangibility and Corporate Performance under External Financing

Abstract

Please enter abstract text here.This paper looks at firm performance under external financing. My tests sidestep the issue of endogeneity between financial contracting and economic outcomes by using asset tangibility (i.e., the resale value or ease of redeployment of the firm's assets) as an instrument. Because asset tangibility changes over time for reasons that are outside of the control of firms and investors (e.g., demand for second-hand assets), it can be used to identify a causal link between firm financing and performance. The identification works along the lines of a moral hazard argument: when asset tangibility is high firms have heightened incentives to perform since liquidation becomes a more credible threat. I show novel evidence that the performance of externally-funded investment is driven by the post-financing value/redeployability of the firm's assets outside of the firm. More concretely, I show that the component of investment that is explained by external financing is associated with superior (inferior) firm product market performance, capital market valuation, and accounting returns when, subsequently to financing, asset tangibility turns out to be high (low) - this happens despite the fact that tangibility does not unconditionally forecast investment performance. Crucially, these sorts tangibility-driven dynamics are not observed for internally-funded investment. Inferences that the firm observes superior performance when assets are ex post more tangible hold differentially for new outside equity and debt financing.