Liquidation, fire sales, and acquirers’ private information
Michi Nishihara and
Takashi Shibata ()
Journal of Economic Dynamics and Control, 2019, vol. 108, issue C
Abstract:
We develop a dynamic model in which a distressed firm optimizes an exit choice between sell-out and default as well as its timing. We assume that the distressed firm is not informed about the acquirer’s asset valuation. We show that the firm delays liquidation to decrease the acquirer’s information rent. Notably, the firm can change the exit choice from sell-out to default when the screening cost is high. In this case, shareholders declare default regardless of the acquirer’s valuation, which provides the acquirer the maximum information rent. Together with the deadweight costs of bankruptcy, the maximal information rent, which causes a wealth transfer from debt holders of the bankrupt firm to the acquirer, lowers the sales price and debt recovery. This mechanism can explain many empirical findings about fire sales and acquirers’ excess gains. Higher volatility, leverage, and asymmetric information increase the likelihood of a fire sale, but higher bankruptcy costs could play a positive role in preventing a fire sale. With asymmetric information, the firm can reduce debt issuance to avoid the risk of a fire sale.
Keywords: Real options; Screening game; Fire sale; M&A; Intertemporal price discrimination (search for similar items in EconPapers)
JEL-codes: D82 G13 G33 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)
Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0165188919301666
Full text for ScienceDirect subscribers only
Related works:
Working Paper: Liquidation, fire sales, and acquirers' private information (2018) 
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text
Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:108:y:2019:i:c:s0165188919301666
DOI: 10.1016/j.jedc.2019.103769
Access Statistics for this article
Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok
More articles in Journal of Economic Dynamics and Control from Elsevier
Bibliographic data for series maintained by Catherine Liu ().