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Asset Redeployability and Capital Structure Choice: The Role of Competition

Asset specificity and the availability of purchasers for the asset in liquidation are not merely additive factors. These factors interact in interesting ways to contribute to the underlying collateral value of assets. This paper focuses on asset redeployability, the role of competition and firms' leverage decisions. Competition captures the availability of potential purchasers of a firm's assets in liquidation. For firms in more competitive domestic industries, there exist a wider array of potential purchasers for their assets in liquidation as compared to firms operating in industries that face competition mainly from imports. It is relatively easier for firms in competitive domestic markets to sell off their assets to competing firms due to commonalities in production technologies. Thus the assets of these firms inherently have a higher collateral value. This results in these firms having a higher leverage as compared to firms operating in import intensive industries.