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Asset Tangibility and Capital Allocation

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.

Publication metadata

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


DOI: 10.1016/j.jcorpfin.2007.05.001


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