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

Salgado, Pablo, Product Market Competition and the Severity of Distressed Asset Sales (October 2, 2011). Available at SSRN: https://ssrn.com/abstract=2015034 or http://dx.doi.org/10.2139/ssrn.2015034

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