Review of Financial Studies Vol. 19 No. 4 2006
Theory and Evidence on the Resolution of Financial Distress
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.
- Volume
- 19
- Issue
- 4
- Pages
- 1357-1397
- Sources
- bibtex:phds-export.bib