I use both the depth of the buyers' market and the trading volume to measure asset liquidity in the contract drilling industry and I find that drilling rigs are less liquid than oil wells. The results indicate that managers avoid selling illiquid assets unless they face high costs for alternative sources of funds. The evidence also suggests that managers follow a “pecking order” of asset sales, selling liquid assets before illiquid assets. Finally, I find evidence that the liquidity of a firm's asset portfolio increases its debt capacity. I conclude that asset liquidity is an important consideration in investment and capital structure decisions.Journal of Economic LiteratureClassification Numbers: G3, G31, G32, G33, L71.