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Do Liquidation Values Affect Financial Contracts? Evidence from Commercial Loan Contracts and Zoning Regulation

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  • Efraim Benmelech
  • Mark J. Garmaise
  • Tobias J. Moskowitz

Abstract

We examine the impact of asset liquidation value on debt contracting using a unique set of commercial property loan contracts. We employ commercial zoning regulation to capture the flexibility of a property's permitted uses as a measure of an asset's redeployability or value in its next best use. Within a census tract, more redeployable assets receive larger loans with longer maturities and durations, lower interest rates, and fewer creditors, controlling for the property's type, sale price, and earnings-to-price ratio. These results are consistent with incomplete contracting and transaction cost theories of liquidation value and financial structure. © 2005 MIT Press

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Bibliographic Info

Article provided by MIT Press in its journal The Quarterly Journal of Economics.

Volume (Year): 120 (2005)
Issue (Month): 3 (August)
Pages: 1121-1154

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Handle: RePEc:tpr:qjecon:v:120:y:2005:i:3:p:1121-1154

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