A Real Options Approach to Bankruptcy Costs: Evidence from Failed Commercial Banks During the 1990s
Literature identifies three main aspects of liquidation costs: firm size, asset specificity, and industry concentration. This paper unifies the theory behind these aspects of bankruptcy costs by treating them as components of a broader option valuation problem faced by the liquidating trustee. Testing the hypothesized asset price relationships on FDIC failed-bank liquidation data yields the appropriate results. Furthermore, it appears that liquidation time alone can be used as an effective second-order proxy for asset value growth where market value estimates are unavailable.