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Liquidation Values and Debt Capacity: A Market Equilibrium Approach

Andrei Shleifer and Robert W. Vishny
The Journal of Finance
Vol. 47, No. 4 (Sep., 1992), pp. 1343-1366
Published by: Wiley for the American Finance Association
DOI: 10.2307/2328943
Stable URL: http://www.jstor.org/stable/2328943
Page Count: 24
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Liquidation Values and Debt Capacity: A Market Equilibrium Approach
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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.

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