The pecking order theory of corporate finance (Myers, 1984) predicts that some sources of funds are more costly than others, and that managers will use the less costly sources first. This paper looks for a pecking order on the left-hand side of the balance sheet. In other words, I ask whether some assets are more costly to sell than other assets, and if these differences affect managerial decisions to sell assets. In order to test these hypotheses, I use a detailed and comprehensive database of asset sales and purchases within the domestic contract drilling industry, covering the period 1978-1990. The results support the hypothesis that some types of assets are relatively difficult to sell, and other assets are relatively easy to sell. These differences are interpreted as liquidity differences across asset types. The identified liquidity differences are then used in several tests. The findings indicate that illiquid assets become more illiquid when the industry is distressed. In addition, I find that the liquidity of the firm's asset portfolio affects both the likelihood and the timing of asset sales. These results suggest that managers should consider the liquidity of the firm's asset portfolio when making capital structure and investment decisions.
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