Real Asset Illiquidity and the Cost of Capital

We show that firms with more illiquid real assets have a higher cost of capital. This effect is stronger when real illiquidity arises from lower within-industry acquisition activity. Real asset illiquidity increases the cost of capital more for firms that face more competition, have less access to e...

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Bibliographic Details
Published inJournal of financial and quantitative analysis Vol. 49; no. 1; pp. 1 - 32
Main Authors Ortiz-Molina, Hernán, Phillips, Gordon M.
Format Journal Article
LanguageEnglish
Published New York, USA Cambridge University Press 01.02.2014
Subjects
Assets
Capital
Companies
Flexibility
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Summary:We show that firms with more illiquid real assets have a higher cost of capital. This effect is stronger when real illiquidity arises from lower within-industry acquisition activity. Real asset illiquidity increases the cost of capital more for firms that face more competition, have less access to external capital, or are closer to default, and for those facing negative demand shocks. The effect of real asset illiquidity is distinct from that of firms’ stock illiquidity or systematic liquidity risk. These results suggest that real asset illiquidity reduces firms’ operating flexibility and through this channel their cost of capital.
ISSN:0022-1090
1756-6916
DOI:10.1017/S0022109014000210