Effect Of Asset Liquidity Research Articles

The effects of asset liquidity on dynamic sell-out and bankruptcy decisions

We develop a dynamic bankruptcy model with asset illiquidity. In the model, a distressed firm chooses between sell-out and default, as well as its timing under the assumption that sell-out is feasible only at Poisson jump times, where the arrival rate of acquirers stands for asset liquidity. With lower asset liquidity, the firm increases the sell-out region to mitigate the risk of not finding an acquirer until bankruptcy. Despite the larger sell-out region, lower asset liquidity increases the default probability and decreases the equity, debt, and firm values. In the optimal capital structure, with lower asset liquidity, the firm reduces leverage, but the cautious capital structure does not fully offset the increased default risk. The stock price reaction caused by sell-out depends on the sell-out timing. When the firm’s asset value is not sufficiently high, the stock price jump size is an inverted U-shape with the economic state variable. Lower asset liquidity increases the jump size due to greater surprise. These results fit empirical observations.

Asset Liquidity and Firm Innovation

This paper examines the effects of asset liquidity on innovation investment. We show that firms with high liquid assets tend to invest more in research and development (R&D) and generate high number of patents and patent citations, even after controlling for stock liquidity and other firm’s characteristics. We further document that this effect is more pronounced for firms with high cash flow uncertainty or less capacity to access external equity capital. Using asset sales as a quasi-natural experiment to detect the change in firms’ asset liquidity, we show that asset sales are significantly positively related to R&D investment. Overall, our findings show that asset liquidity is an important determinant of innovation investment.

Asset Liquidity and Capital Structure

AbstractThis paper tests alternative theories about the effect of asset liquidity on capital structure. Using data from a broad sample of U.S. public companies, I find that leverage is positively related to asset liquidity. Further analysis reveals that the relation between asset liquidity and secured debt is positive, whereas the relation between asset liquidity and unsecured debt is curvilinear. The results are consistent with the view that the costs of financial distress and inefficient liquidation are economically important and that they affect capital structure decisions. In addition, the results are consistent with the hypothesis that the costs of managerial discretion increase with asset liquidity.

Asset Liquidity and Capital Structure

This paper tests alternative theories about the effect of asset liquidity on capital structure. Using data from a broad sample of U.S. public companies, I find that leverage is positively related to asset liquidity. Further analysis reveals that the relation between asset liquidity and secured debt is positive, whereas the relation between asset liquidity and unsecured debt is curvilinear. The results are consistent with the view that the costs of financial distress and inefficient liquidation are economically important and that they affect capital structure decisions. In addition, the results are consistent with the hypothesis that the costs of managerial discretion increase with asset liquidity.

The Effects of Asset Liquidity: Evidence from the Contract Drilling Industry

I use both the depth of the buyers' market and the trading volume to measure asset liquidity in the contract drilling industry and I find that drilling rigs are less liquid than oil wells. The results indicate that managers avoid selling illiquid assets unless they face high costs for alternative sources of funds. The evidence also suggests that managers follow a “pecking order” of asset sales, selling liquid assets before illiquid assets. Finally, I find evidence that the liquidity of a firm's asset portfolio increases its debt capacity. I conclude that asset liquidity is an important consideration in investment and capital structure decisions.Journal of Economic LiteratureClassification Numbers: G3, G31, G32, G33, L71.

Liquidity, Maturity, and the Yields on U.S. Treasury Securities

ABSTRACTThe effects of asset liquidity on expected returns for assets with infinite maturities (stocks) are examined for bonds (Treasury notes and bills with matched maturities of less than 6 months). The yield to maturity is higher on notes, which have lower liquidity. The yield differential between notes and bills is a decreasing and convex function of the time to maturity. The results provide a robust confirmation of the liquidity effect in asset pricing.