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Liquidation Values and Debt Capacity: A Market Equilibrium Approach
Author(s) -
SHLEIFER ANDREI,
VISHNY ROBERT W.
Publication year - 1992
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1992.tb04661.x
Subject(s) - leverage (statistics) , debt , financial distress , asset (computer security) , business , monetary economics , book value , ex ante , asset turnover , financial economics , economics , finance , financial system , return on assets , computer security , earnings , machine learning , profitability index , computer science , macroeconomics
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.