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Lookup NU author(s): Dr Diemo DietrichORCiD
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Firms comprise divisions that often differ with respect to the degree of asset tangibility. As the strength of borrowing constraints depends on the liquidation value of assets, these firms influence their debt capacity by allocating funds across divisions. We argue that a company whose capital allocation is not verifiable suffers from a dynamic inconsistency problem, as it tends to allocate resources in favor of divisions with fewer tangible assets, leading to a tight borrowing constraint. When capital allocation is verifiable, committing to invest only little there eases this constraint, although it implies a deviation from a return maximizing allocation.
Author(s): Dietrich D
Publication type: Article
Publication status: Published
Journal: Journal of Corporate Finance
Year: 2007
Volume: 13
Issue: 5
Pages: 995-1007
ISSN (print): 0929-1199
ISSN (electronic): 1872-6313
Publisher: Elsevier BV
URL: http://dx.doi.org/10.1016/j.jcorpfin.2007.05.001
DOI: 10.1016/j.jcorpfin.2007.05.001
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