David T. Brown Brian A. Ciochetti Timothy J. Riddiough
Abstract
We analyze a financially distressed owner-managed project. The main results of the model are: (1) borrower default is an endogenous response to the anticipated restructuring--foreclosure outcome; (2) the lender's restructuring--foreclosure decision depends critically on the interaction between project value and industry liquidity; and (3) the lender waits for the industry to recapitalize before selling assets obtained through foreclosure. Empirical analysis of a large sample of defaulted commercial real estate loans supports many of the model predictions, including restructuring--foreclosure outcomes that are consistent with endogenous borrower default and firesale discounts that vary depending on industry market conditions at the time of foreclosure. (JEL G33) Copyright 2006, Oxford University Press.
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Article provided by Oxford University Press for Society for Financial Studies in its journal The Review of Financial Studies.