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Asset Liquidity and Capital Structure

Published online by Cambridge University Press:  01 October 2009

Valeriy Sibilkov
Valeriy Sibilkov*
Affiliation:
Lubar School of Business, University of Wisconsin–Milwaukee, 3202 N. Maryland Ave., Milwaukee, WI 53211. sibilkov@uwm.edu
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Abstract

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.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 44 , Issue 5 , October 2009 , pp. 1173 - 1196
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2009

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