Real Assets, Liquidation Value and Choice of Financing

Abstract

We use real estate investment trusts to examine how asset liquidation values influence a firm's financing choices, since the productivity and quality of each asset is observable and potential measures of an asset's liquidation value are easier to ascertain ex-ante. We show that compared to firms that issue equity, firms that issue debt have higher asset quality. The effect of their expected asset liquidation value is significant, even after we control for other factors that influence financing decisions. For firms whose assets quality is not easily observable, we find that firms' financing choices depend heavily on conditions in the overall real asset market.

Keywords: Financing, REITs, Tenant Quality, Firesale Discount, Industry Diversification, Liquidation Value, Cap Rate, Capital Structure