American Economic Journal:
Microeconomics
ISSN 1945-7669 (Print) | ISSN 1945-7685 (Online)
Bankruptcy, Finance Constraints, and the Value of the Firm
American Economic Journal: Microeconomics
(pp. 1–37)
Abstract
We study a competitive model in which market incompleteness implies that debt-financed firms may default in some states of nature, and default may lead to the sale of the firms' assets at fire sale prices when a finance constraint is binding. The anticipation of such "losses" alone may distort firms' investment decisions. We characterize the conditions under which fire sales occur in equilibrium, and their consequences on firms' investment decisions. We also show that endogenous financial crises may arise in this environment, with asset prices collapsing as a result of pure self-fulfilling beliefs. Finally, we examine alternative interventions to restore the efficiency of equilibria. (JEL D83, G31, G32, G33)Citation
Gale, Douglas, and Piero Gottardi. 2011. "Bankruptcy, Finance Constraints, and the Value of the Firm." American Economic Journal: Microeconomics 3 (2): 1–37. DOI: 10.1257/mic.3.2.1JEL Classification
- D83 Search; Learning; Information and Knowledge; Communication; Belief
- G31 Capital Budgeting; Fixed Investment and Inventory Studies; Capacity
- G32 Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure
- G33 Bankruptcy; Liquidation