Theory and Evidence on the Resolution of Financial Distress

Posted: 29 Feb 2008

See all articles by David T. Brown

David T. Brown

University of Florida - Department of Finance, Insurance and Real Estate

Brian A. Ciochetti

Independent

Timothy J. Riddiough

University of Wisconsin - School of Business - Department of Real Estate and Urban Land Economics

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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. (JEL G33)

Suggested Citation

Brown, David T. and Ciochetti, Brian A. and Riddiough, Timothy J., Theory and Evidence on the Resolution of Financial Distress. The Review of Financial Studies, Vol. 19, Issue 4, pp. 1357-1397, 2006, Available at SSRN: https://ssrn.com/abstract=1097946 or http://dx.doi.org/10.1093/rfs/hhj031

David T. Brown (Contact Author)

University of Florida - Department of Finance, Insurance and Real Estate ( email )

P.O. Box 117168
Gainesville, FL 32611
United States
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Brian A. Ciochetti

Independent

Timothy J. Riddiough

University of Wisconsin - School of Business - Department of Real Estate and Urban Land Economics ( email )

School of Business
975 University Avenue
Madison, WI 53706
United States
608-262-3531 (Phone)
608-265-2738 (Fax)

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