In this paper, we explore the link between asset sales end debt capacity. Asset sales are a cormon way far firms to raise saab, and so present an alternative to security issues for firms near financial distress. We argue that liquid assets --those tba c con be resold at attractive terms --are good candidates for debt finance because financial distress for fis with such assets relatively inexpensive. We apply this logic to explain variocion in debt capacity across industries and over the bosiness cycle, as well as to the rise in g.5. corporate leverage in the 1980s.

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The Stock Market and Investment: I s t he Market a Sideshow? RECENT EVENTS and research findings increasingly suggest that the stock market is not driven solely by news about fundamentals. There seem to be good theoretical as well as empirical reasons to believe that investor sentiment, also referred to as fads and fashions, affects stock prices. By investor sentiment we mean beliefs held by some investors that cannot be rationally justified. Such investors are sometimes referred to as noise traders. To affect prices, these less-than-rational beliefs have to be correlated across noise traders, otherwise trades based on mistaken judgments would cancel out. When investor sentiment affects the demand of enough investors, security prices diverge from fundamental values. The debates over market efficiency, exciting as they are, would not be important if the stock market did not affect real economic activity. If the stock market were a sideshow, market inefficiencies would merely redistribute wealth between smart investors and noise traders. But if the stock market influences real economic activity, then the investor sentiment that affects stock prices could also indirectly affect real activity.

We examine performance and management characteristics of Fortune 500 firms experiencing one of three types of control change: internally pricipitated management turnover, hostile takeover, and friendly takeover. We find that firms experiencing internally precipitated management turnover perform poorly relative to other firms in their industries, but are not concentrated in poorly performing industries. In contrast, targets of hostile takeovers are concentrated in troubled industries. There is also weaker evidence that hostile takeover targets underperform their industry peers. We interpret this evidence as consistent with the idea that the board of directors is capable of firing managers whose leadership leads to poor performance relative to industry, but that an external challenge in the form of a hostile takeover is often required when th. whole industry is in decline.The evidence also indicates that firms run by a me.ber of the founding family are less likely to experience either internally precipitated top management turnover or a hostili takeover. On the other hand, firms whose top management team is dominated by a single, relatively young top executive, while lacking in internal discipline, are more likely to experience a hostile takeover.