Capital Structure and Assets: Effects of an Implicit Collateral

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This paper analyzes 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-optimize 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.

Translated title of the contributionCapital Structure and Assets: Effects of an Implicit Collateral
Original languageEnglish
JournalEuropean Financial Management
Issue number2
Pages (from-to)347-373
Publication statusPublished - 1. Mar 2008


  • Optimal capital structure
  • uncertain asset value
  • debt restructuring


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