Journal of Financial and Quantitative Analysis

Research Articles

Asset Liquidity and Capital Structure

Valeriy Sibilkova1

a1 Lubar School of Business, University of Wisconsin–Milwaukee, 3202 N. Maryland Ave., Milwaukee, WI 53211.


This paper tests alternative theories about the effect of asset liquidity on capital structure. Using data from a broad sample of U.S. public companies, I find that leverage is positively related to asset liquidity. Further analysis reveals that the relation between asset liquidity and secured debt is positive, whereas the relation between asset liquidity and unsecured debt is curvilinear. The results are consistent with the view that the costs of financial distress and inefficient liquidation are economically important and that they affect capital structure decisions. In addition, the results are consistent with the hypothesis that the costs of managerial discretion increase with asset liquidity.


I am grateful for helpful comments received from Michael Cliff, Michael Cooper, David Denis, Diane Denis, John Graham, Paul Malatesta (the editor), John McConnell, Frederik Schlingemann (the referee), Mira Straska, Greg Waller, Qinghai Wang, and finance workshop participants at Purdue University, the University of Missouri, and the University of Wisconsin–Milwaukee.