Liquidation Values and Debt Capacity: A Market Equilibrium Approach

Abstract

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.

Human Resources Turnover as an Asset Acquisition, Accumulation and Divesture Process

“…Efficiency explanations suggest that this decision is the result of efforts to allocate assets to those firms that can operate them in the most efficient manner (see Hite, Owers & Rogers, 1987;Jain, 1985;Maksimovic and Phillips, 2001). Finally, it has been also proposed that the divesture of assets is undertaken in order to reduce the financial leverage and credit pressure within a firm (see Afshar, Taffler and Sundarsanam, 1992;Lang, Poulsen & Stulz, 1995;Lasfer, Sudarsanam & Taffler, 1996;Shleifer and Vishny, 1997).…”

The joint impact of bankruptcy costs, fire sales and cross-holdings on systemic risk in financial networks

“…Evidence is discussed in several papers including Brunnermeier (2009), Coval and Stafford (2007), Cont and Wagalath (2016), Jotikasthira et al (2012), Khandani and Lo (2011), and Shleifer and Vishny (1992). In real markets, fire sales typically refer to the liquidation of portfolios.…”

Financing Bidders in Takeover Contests

“…Considering that bidders' incentives to participate in takeover auctions depend on the available …nancing conditions, the issue is important also from a regulatory perspective. For example, there have been widespread concerns that entry in bankruptcy auctions is deterred by the inability of bidders to raise cash at favorable terms, making such auctions illiquid and leading to …re sales (e.g., Shleifer and Vishny, 1992;Hart, 2000). In practice, however, Baird and Rasmussen (2003) and Hotchkiss and Mooradian (1998) …nd that 30 to 50 percent of successful reorganizations under Chapter 11 involve multiple bidders.…”