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Does Asset Durability Impede Financing? An Empirical Assessment

Nusrat Jahan ()
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Nusrat Jahan: Department of Economics, Carleton University,

No 20-17, Carleton Economic Papers from Carleton University, Department of Economics

Abstract: Does asset durability limit firms’ ability to obtain external financing when they are financially constrained? According to theory, an increase in durability increases the down-payment required to purchase a tangible asset, and hence the overall financing needs by a firm (Rampini (2019)). Using the depreciation rate to measure asset durability, I find financing frictions can affect firm investment through the asset durability channel. Specifically, asset durability increases external financing costs for financially constrained firms, but the effect is ambiguous for unconstrained firms. Additionally, I find when firms endogenously choose asset durability, more (less) financially constrained firms invest in less (more) durable capital. These results provide mixed support to the idea that the durability of an asset impedes financing.

Pages: 39 pages
Date: 2020-09
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Published: Carleton Economics Papers

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Handle: RePEc:car:carecp:20-17