A Real Options Approach to Bankruptcy Costs: Evidence from Failed Commercial Banks During the 1990s

Joseph R. Mason
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Joseph R. Mason: Drexel University and Wharton Financial Institutions Center

The Journal of Business, 2005, vol. 78, issue 4, 1523-1554

Abstract: Literature identifies three main aspects of liquidation costs: firm size, asset specificity, and industry concentration. This paper unifies the theory behind these aspects of bankruptcy costs by treating them as components of a broader option valuation problem faced by the liquidating trustee. Testing the hypothesized asset price relationships on FDIC failed-bank liquidation data yields the appropriate results. Furthermore, it appears that liquidation time alone can be used as an effective second-order proxy for asset value growth where market value estimates are unavailable.

Date: 2005
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Persistent link: https://EconPapers.repec.org/RePEc:ucp:jnlbus:v:78:y:2005:i:4:p:1523-1554

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