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Capital Structure and Assets: Effects of an Implicit Collateral
Author(s) -
Riis Flor Christian
Publication year - 2008
Publication title -
european financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.311
H-Index - 64
eISSN - 1468-036X
pISSN - 1354-7798
DOI - 10.1111/j.1468-036x.2007.00393.x
Subject(s) - ex ante , leverage (statistics) , capital structure , book value , collateral , earnings , business , tax shield , asset (computer security) , monetary economics , working capital , enterprise value , fixed asset , equity (law) , economics , financial economics , finance , microeconomics , debt , production (economics) , computer security , tax reform , machine learning , computer science , political science , gross income , law , public economics , macroeconomics , state income tax
This paper analyses a firm's capital structure choice when assets have outside value. Valuable assets implicitly provide a collateral and increase tax shield exploitation. The key feature in this paper is asset value uncertainty, implying that it is unknown ex ante whether the equity holders ex post optimally sell the assets or re‐optimise the capital structure. Ex ante, more uncertain asset value decreases leverage, but not firm value, and selling the assets becomes less likely. Firms should tend to invest in assets whose value is less correlated to changes in earnings and, in addition, asset sales are less likely when this correlation is low.