Asset Specificity of Nonfinancial Firms

Abstract

We develop a new dataset to study asset specificity among nonfinancial firms. Our data covers the liquidation values of each category of assets on firms’ balance sheets, and provides information across major industries. First, we find that nonfinancial firms have high asset specificity. For example, the liquidation value of fixed assets is 35% of the net book value in the average industry. Second, we analyze the determinants of asset specificity, and document that assets’ physical attributes (e.g., mobility, durability, and customization) play a crucial role. Third, we investigate several implications. Consistent with theories of investment irreversibility, high asset specificity is associated with less disinvestment and stronger effects of uncertainty on investment activities. We also find that the increasing prevalence of intangible assets has not significantly reduced firms’ liquidation values.

A Theory of Cash Flow-Based Financing with Distress Resolution

“…In addition, firms with lower liquidation value have lower asset-based financing capacity and thus tend to use more cash flow-based financing. These model implications are broadly consistent with Lian and Ma (2021) and Kermani and Ma (2023).…”

“…We follow Bolton et al (2011) in setting r, µ, λ. We set the liquidation value to L = 1, which is about 33.3% of the firm's N P V = µ/r = 3 in line with the liquidation values of nonfinancial firms reported in Kermani and Ma (2023). We take the intermediary's CARA coefficient ρ = 6, similar to He (2011), and normalize σ = 1, which also normalizes Y A = 0.…”

“…Consequently, a shock to the intermediary sector implies a shift from cash flow-based toward asset-based financing. Third, cash flow-based financing is more prevalent among firms with high profitability, low cash flow volatility, or low liquidation value (Kermani and Ma, 2023). Fourth, firms tend to use unsecured debt in all states and secured debt primarily when low on cash or in distress (Benmelech, Kumar, and Rajan, 2020a).…”

Mitigating Climate Change at the Firm Level: Mind the Laggards

“…The depreciation rate of knowledge δ a is calibrated following Doraszelski and Jaumandreu (2013) and sources therein. The fraction of the capital stock that can be resold by a firm upgrading its capital stock, χ, is calibrated to match the finding by Kermani and Ma (2022) that on average 65% of the capital stock is firm-specific, which implies χ = .35. We calibrate the difference between the growth rate of vintage productivity and price to match the estimated value of 3.2% in Greenwood et al (1997).…”

“…As a result, a firm that updates its vintage needs to replace the entire stock of capital. Second, building on the findings of Kermani and Ma (2022) that most of the value of the capital stock is firm-specific, we assume that if a firm decides to retire its old vintage of capital, upgrade, and invest in a newer capital stock, it cannot recover all the value of its capital on secondary markets. If a firm decides to switch vintage, it recovers 26 ©International Monetary Fund.…”