Accepted Publication

Specialization, Productivity, and Financing Constraints

Professor Robert Marquez

Co-Author M. Deniz Yavuz

This paper studies firms’ choices of how much to invest in specialized assets when they need to raise financing in order to invest.  In a theoretical model, we show that having highly specialized assets has two effects on the financial constraints firms face.  First, specialized assets are typically more difficult to sell if the firm runs into trouble precisely because they are more specialized, so that they have relatively low values in alternative uses.  This reduces the value of these assets as collateral and makes obtaining financing more difficult and more costly.  Second, however, more specialized assets are more productive if used for their intended purpose, and that makes the continuation value of the firm higher.  The higher continuation value serves as a disciplining force for the company’s management, and makes them more likely to repay their debt in order not to be liquidated or have control taken away from them.  This second effect therefore loosens financing constraints and makes financing easier to obtain, and cheaper.