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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 redeploy ability 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.

Suggested Citation

  • Efraim Benmelech & Mark J. Garmaise & Tobias J. Moskowitz, 2005. "Do Liquidation Values Affect Financial Contracts? Evidence from Commercial Loan Contracts and Zoning Regulation," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 120(3), pages 1121-1154.
    • Handle: RePEc:oup:qjecon:v:120:y:2005:i:3:p:1121-1154.
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    File URL: http://hdl.handle.net/10.1093/qje/120.3.1121
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    JEL classification:

    • G3 - Financial Economics - - Corporate Finance and Governance
    • R0 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General

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