Asset Specificity and the Secondary Market for Productive Assets

Simone Boccaletti ()
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Simone Boccaletti: University of Milano-Bicocca

Italian Economic Journal: A Continuation of Rivista Italiana degli Economisti and Giornale degli Economisti, 2021, vol. 7, issue 3, No 4, 437 pages

Abstract: Abstract The aim of this paper is to explore how debt contracts are affected by investment in asset specialization and by the dynamics of the secondary market for collateralized productive assets. Before applying for a loan, financially constrained firms face a specificity trade-off: asset specialization increases firms’ project returns, but decreases the liquidation value of assets in the secondary market if the firm is in financial distress. To study this trade-off, the paper uses a theoretical model in which the choice of asset specificity and the outcome of the secondary market for distressed firms’ assets are endogenous. High redeployability costs and a small number of participants in the secondary market are associated to low recovery values and to a high cost of debt. The paper shows the conditions under which financial constraints reduce firms’ incentive to invest in asset specificity.

Keywords: Collateral; Asset specificity; Liquidation value; Financial constraints (search for similar items in EconPapers)
JEL-codes: G32 G33 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1007/s40797-020-00136-x

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