Liquidation Values and Debt Capacity: A Market Equilibrium Approach

Andrei Shleifer and Robert W. Vishny

Scholarly Articles from Harvard University Department of Economics

Abstract: We explore the determinants of liquidation values of assets, particularly focusing on the potential buyers of assets. When a firm in financial distress needs to sell assets, its industry peers are likely to be experiencing problems themselves, leading to asset sales at prices below value in best use. Such illiquidity makes assets cheap in bad times, and so ex ante is a significant private cost of leverage. We use this focus on asset buyers to explain variation in debt capacity across industries and over the business cycle, as well as the rise in U.S. corporate leverage in the 1980s.

Date: 1992
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Published in The Journal of Finance

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Journal Article: Liquidation Values and Debt Capacity: A Market Equilibrium Approach (1992)
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Persistent link: https://EconPapers.repec.org/RePEc:hrv:faseco:27692663

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