Nondiscriminating Foreclosure and Voluntary Liquidating Costs

Ko Wang; Leslie Young; Yuqing Zhou

doi:10.1093/rfs/15.3.959

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Nondiscriminating Foreclosure and Voluntary Liquidating Costs

Ko Wang^1,2; Leslie Young²; Yuqing Zhou²

¹ California State University, Fullerton · ² Chinese University of Hong Kong

Review of Financial Studies 2002

Since liquidation and bankruptcy are costly, researchers have tried to find out why the claimants of a troubled firm do not work out a deal to avoid these costs. In this article we show that if a creditor has to deal with multiple borrowers who might default, it may be optimal for the creditor to randomly reject requests for a loan workout. We further demonstrate that the optimal acceptance rate used by a creditor is positively related to the liquidating cost and negatively related to the default benefit. Our model is particularly relevant when analyzing the default decisions of mortgage borrowers and small business owners.

DOI: 10.1093/rfs/15.3.959
Volume: 15 (3)
Pages: 959-985
Language: en
Export: BibTeX
Sources: openalex crossref