Product Market Competition and the Severity of Distressed Asset Sales
43 Pages Posted: 4 Mar 2012
Date Written: October 2, 2011
Abstract
If financial distress comes with such big costs, why do firms not take further precautionary measures to avoid it? I focus on a specific form of financial distress costs, those associated with asset fire-sales, and show that the contest for monopoly power among firms with financial constraints leads them to expend insufficient efforts to avoid financial distress. The clearest prediction that results from the analysis is that equilibrium distress costs should increase with the rents associated to monopoly power in the product market in which firms operate.
Keywords: Fire-Sales, Stochastic Games, Product Market Competition
JEL Classification: G3
Suggested Citation: Suggested Citation