Asset Liquidity and the Cost of Capital

52 Pages Posted: 17 May 2010 Last revised: 14 Mar 2021

See all articles by Hernan Ortiz-Molina

Hernan Ortiz-Molina

University of British Columbia (UBC) - Sauder School of Business

Gordon M. Phillips

Dartmouth College - Tuck School of Business; National Bureau of Economic Research (NBER)

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Date Written: May 2010

Abstract

We study the effect of real asset liquidity on a firm's cost of capital. We find an aggregate asset-liquidity discount in firms' cost of capital that is strongly counter-cyclical. At the firm-level we find that asset liquidity affects firms' cost of capital both in the cross section and in the time series: Firms in industries with more liquid assets and during periods of high asset liquidity have lower cost of capital. This effect is stronger when the asset liquidity is provided by firms operating within the industry. We also find that higher asset liquidity reduces the cost of capital by more for firms that face more competitive risk in product markets, have less access to external capital or are closer to default, and for those facing negative demand shocks. Our results suggest that asset liquidity is valuable to firms and, more generally, that operating inflexibility is an economically important source of risk.

Suggested Citation

Ortiz-Molina, Hernan and Phillips, Gordon M., Asset Liquidity and the Cost of Capital (May 2010). NBER Working Paper No. w15992, Available at SSRN: https://ssrn.com/abstract=1607502

Hernan Ortiz-Molina (Contact Author)

University of British Columbia (UBC) - Sauder School of Business ( email )

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Gordon M. Phillips

Dartmouth College - Tuck School of Business ( email )

Hanover, NH 03755
United States

National Bureau of Economic Research (NBER)

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