Real asset liquidity,cash holdings,and the cost of corporate debt |
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Affiliation: | 1. Department of Accounting and Finance, College of Business, University of Wyoming, Laramie, WY, USA;2. Department of Finance and Business Law, James Madison University, USA |
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Abstract: | We study the impact of the interplay between cash holdings and asset sales on the corporate debt spread. We allow cash holdings and asset sales to assist with both debt repayment and sequential investments. The interplay between cash holdings and asset sales leads to a convex relationship between credit spreads and the liquidity of the market for real assets. We use the 2008 financial crisis as a natural experiment and find that post-2008, the nonlinearity of the link between credit spreads and asset liquidity is pronounced, closely matching analytical predictions. This is especially acute for highly leveraged and low profitability firms. |
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