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Capital Structure and Assets: Effects of an Implicit Collateral


  • I appreciate comments from seminar participants at the University of Southern Denmark, at the Danish Doctoral Educational Network in Finance, and at the European Finance Association's 29 th annual meeting, Berlin, 2002. In particular I thank Nicole Branger, Peter O. Christensen, Edmund Christiansen, Bjarne Astrup Jensen, Pierre Mella-Barral, Kristian R. Miltersen, Claus Munk, Carsten Sørensen, Josef Zechner, Ivo Welch, John Doukas (the editor), and an anonymous referee for helpful comments. Financial support from the Danish Research Council for Social Sciences is gratefully acknowledged.


This paper analyses 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-optimise 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.