THE EFFECTS OF ASSET LIQUIDITY - EVIDENCE FROM THE CONTRACT DRILLING INDUSTRY

I use both the depth of the buyers' market and the trading Volume to m easure asset Liquidity in the contract drilling industry and I find th at drilling rigs are less liquid than oil wells. The results indicate that managers avoid selling illiquid assets unless they face high cost s for alternative sources of funds. The evidence also suggests that ma nagers follow a ''pecking order'' of asset sales, selling liquid asset s before illiquid assets. Finally, I find evidence that the liquidity of a firm's asset portfolio increases its debt capacity. I conclude th at asset liquidity is an important consideration in investment and cap ital structure decisions. (C) 1998 Academic Press.