The aim of this paper is to explore how debt contracts are affected by investment in asset specialization and by the dynamics of the secondary market for collateralized productive assets. Before applying for a loan, financially constrained firms face a specificity trade-off: asset specialization increases firms’ project returns, but decreases the liquidation value of assets in the secondary market if the firm is in financial distress. To study this trade-off, the paper uses a theoretical model in which the choice of asset specificity and the outcome of the secondary market for distressed firms’ assets are endogenous. High redeployability costs and a small number of participants in the secondary market are associated to low recovery values and to a high cost of debt. The paper shows the conditions under which financial constraints reduce firms’ incentive to invest in asset specificity.

Boccaletti, S. (2021). Asset Specificity and the Secondary Market for Productive Assets. ITALIAN ECONOMIC JOURNAL, 7(3), 411-437 [10.1007/s40797-020-00136-x].

Asset Specificity and the Secondary Market for Productive Assets

Boccaletti S.
2021

Abstract

The aim of this paper is to explore how debt contracts are affected by investment in asset specialization and by the dynamics of the secondary market for collateralized productive assets. Before applying for a loan, financially constrained firms face a specificity trade-off: asset specialization increases firms’ project returns, but decreases the liquidation value of assets in the secondary market if the firm is in financial distress. To study this trade-off, the paper uses a theoretical model in which the choice of asset specificity and the outcome of the secondary market for distressed firms’ assets are endogenous. High redeployability costs and a small number of participants in the secondary market are associated to low recovery values and to a high cost of debt. The paper shows the conditions under which financial constraints reduce firms’ incentive to invest in asset specificity.
Articolo in rivista - Articolo scientifico
Asset specificity; Collateral; Financial constraints; Liquidation value;
English
411
437
27
Boccaletti, S. (2021). Asset Specificity and the Secondary Market for Productive Assets. ITALIAN ECONOMIC JOURNAL, 7(3), 411-437 [10.1007/s40797-020-00136-x].
Boccaletti, S
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/10281/354901
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