Do Tangible Assets Support Long-Term Debt? New Evidence from Unsecured Debt Financing by Small Firms
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Higher liquidation value is believed to support longer-term debt. In contrast, more recent theories argue that extreme asset liquidity can indeed shorten the optimal maturity to mitigate asset substitution problems. Using industry-and region-specific tangibility suggested by Shleifer and Vishny (1992), we attempt to test these seemingly conflicting predictions. We find that the maturity of unsecured credit lines is a nonmonotonic function of liquidity, supporting Myers and Rajan (1998). Specifically, extreme asset liquidity reduces the maturity of unsecured credit lines, whereas there is no such effect for fixed asset loans, which restrict the disposition of assets financed with the loans.
Abstract
Higher liquidation value is believed to support longer-term debt. In contrast, more recent theories argue that extreme asset liquidity can indeed shorten the optimal maturity to mitigate asset substitution problems. Using industry-and region-specific tangibility suggested by Shleifer and Vishny (1992), we attempt to test these seemingly conflicting predictions. We find that the maturity of unsecured credit lines is a nonmonotonic function of liquidity, supporting Myers and Rajan (1998). Specifically, extreme asset liquidity reduces the maturity of unsecured credit lines, whereas there is no such effect for fixed asset loans, which restrict the disposition of assets financed with the loans.
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