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Real Asset Illiquidity and the Cost of Capital

Published online by Cambridge University Press:  23 April 2014

Hernán Ortiz-Molina  and
Gordon M. Phillips
Hernán Ortiz-Molina
Affiliation:
[email protected], Sauder School of Business, University of British Columbia, 2053 Main Mall, Vancouver, BC V6T 1Z2, Canada
Gordon M. Phillips
Affiliation:
[email protected], Marshall School of Business, University of Southern California, 3670 Trousdale Pkwy, Los Angeles, CA 90089 and National Bureau of Economic Research.
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Abstract

We show that firms with more illiquid real assets have a higher cost of capital. This effect is stronger when real illiquidity arises from lower within-industry acquisition activity. Real asset illiquidity increases the cost of capital more for firms that face more competition, have less access to external capital, or are closer to default, and for those facing negative demand shocks. The effect of real asset illiquidity is distinct from that of firms’ stock illiquidity or systematic liquidity risk. These results suggest that real asset illiquidity reduces firms’ operating flexibility and through this channel their cost of capital.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 49 , Issue 1 , February 2014 , pp. 1 - 32
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2014 

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