We characterize the relation between asset structure and capital structure by exploiting variation in the salability of corporate assets. To establish this link, we distinguish across different assets in firms’ balance sheets (machinery, land, and buildings) and use an instrumental approach that incorporates market conditions for those assets. We also use a natural experiment driving differential increases in the supply of real estate assets across the United States: The Defense Base Closure and Realignment Act of 1990. Consistent with a supply-side view of capital structure, we find that asset redeployability is a main driver of leverage when credit frictions are high.

We study the capital investment, stock issuance, and cash savings behavior of non-tech manufacturers (old economy firms) during the 1990s technology bubble. Our empirical results show that high stock prices affect corporate policies because they relax financing constraints. During the tech bubble, constrained non-tech firms' investment responded strongly to “high stock prices” (specifically, the component of price that is not captured by fundamentals). They also issued stock in response to that overvaluation effect, saving part of the proceeds in their cash accounts. We find no such patterns for unconstrained non-tech firms, nor for tech firms. Our findings are not consistent with the notion that managers systematically issue overvalued stocks and invest in ways that transfer wealth from new to old shareholders. More broadly, they suggest that what appears to be overvaluation in one sector of the economy may have positive externalities for other sectors.

Banks can create liquidity for firms by pooling their idiosyncratic risks. As a result, bank lines of credit to firms with greater aggregate risk should be costlier and such firms opt for cash in spite of the incurred liquidity premium. We find empirical support for this novel theoretical insight. Firms with higher beta have a higher ratio of cash to credit lines and face greater costs on their lines. In times of heightened aggregate volatility, banks exposed to undrawn credit lines become riskier; bank credit lines feature fewer initiations, higher spreads, and shorter maturity; and, firms’ cash reserves rise.