The value implications of restrictions on asset sales

This paper examines the effect of restrictions over asset disposition, measured by the ratio of secured debt to fixed assets, on firm value. We find evidence consistent with two non-mutually exclusive hypotheses. (1) Restrictions on the disposition of assets reduce firm value by limiting a firm's ability to restructure assets or to raise funds to finance higher NPV projects. (2) Restrictions on asset disposition increase firm value by limiting agency costs of managerial discretion over uncommitted assets. The net effect of restrictions over asset disposition on firm value is determined by potential agency problems and the need for operating flexibility.