IDEAS home Printed from https://ideas.repec.org/p/cdl/ucsbec/qt4fq7n6pj.html

Liquidity and Liquidation

Author

Listed:
  • Kelly, David
  • LeRoy, Stephen F.

Abstract

The manager of a firm that is selling an illiquid asset has discretion as to the sale price: if he chooses a high (low) selling price, early sale is unlikely (likely). If the manager has the option to default on the debt that is collaterized by the illiquid asset, the optimal selling price depends on whether the manager acts in the interest of the owners or the creditors. We model the former case. In the preferred equilibrium, the owner will always offer the illiquid asset for sale at a strictly higher price than he paid, and he will always default if he fails to sell. As a result, the illiquid asset changes hands at successively higher prices; the price inflation terminates upon the first failure to sell, which results in a default chain.

Suggested Citation

  • Kelly, David & LeRoy, Stephen F., 2001. "Liquidity and Liquidation," University of California at Santa Barbara, Economics Working Paper Series qt4fq7n6pj, Department of Economics, UC Santa Barbara.
    • Handle: RePEc:cdl:ucsbec:qt4fq7n6pj
    as

    Download full text from publisher

    File URL: https://www.escholarship.org/uc/item/4fq7n6pj.pdf;origin=repeccitec
    Download Restriction: no
    ---><---

    Other versions of this item:

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. is not listed on IDEAS
    2. John Krainer & Mark M. Spiegel & Nobuyoshi Yamori, 2010. "Asset Price Persistence and Real Estate Market Illiquidity: Evidence from Japanese Land Values," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 38(2), pages 171-196, June.
    3. John Krainer & Mark M. Spiegel & Nobuyoshi Yamori, 2005. "Asset Price Declines and Real Estate Market Illiquidity: Evidence from Japanese Land Values," Working Paper Series 2004-16, Federal Reserve Bank of San Francisco.
    4. David L. Kelly & Stephen F. LeRoy, 2005. "Liquidity and fire sales," Proceedings, Board of Governors of the Federal Reserve System (U.S.), pages 249-270.

    More about this item

    Keywords

    ;
    ;

    JEL classification:

    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cdl:ucsbec:qt4fq7n6pj. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Lisa Schiff (email available below). General contact details of provider: https://edirc.repec.org/data/educsus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.