Asset Selling Under Debt Obligations

Hyun-soo Ahn, Derek Wang, Owen Wu, Asset Selling under Debt Obligations, Operations Research, Forthcoming

46 Pages Posted: 29 Oct 2019

See all articles by Hyun-Soo Ahn

Hyun-Soo Ahn

University of Michigan, Stephen M. Ross School of Business

Derek D. Wang

University of Michigan, Stephen M. Ross School of Business

Owen Q. Wu

Indiana University - Kelley School of Business

Date Written: May 7, 2019

Abstract

We extend the classical asset-selling problem to include debt repayment obligation, selling capacity constraint, and Markov price evolution. Specifically, we consider the problem of selling a divisible asset which is acquired through debt financing. The amount of asset that can be sold per period may be limited by physical constraints. The seller uses part of the sales revenue to repay the debt. If unable to pay off the debt, the seller must go bankrupt and liquidate the remaining asset. Our analysis reveals that in the presence of debt, the optimal asset-selling policy must take into account two opposing forces: an incentive to sell part of the asset early to secure debt payment and an incentive to delay selling the asset to capture revenue potential under limited liability. We analyze how these two forces, originating from debt financing, will distort the seller’s optimal policy.

Keywords: asset selling, limited liability, bankruptcy cost, capacity constraint

JEL Classification: C60, G30, Q30

Suggested Citation

Ahn, Hyun-Soo and Wang, Derek D. and Wu, Owen Q., Asset Selling Under Debt Obligations (May 7, 2019). Hyun-soo Ahn, Derek Wang, Owen Wu, Asset Selling under Debt Obligations, Operations Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3472345

Hyun-Soo Ahn

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan St
R5456
Ann Arbor, MI 48109-1234
United States

Derek D. Wang

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

Owen Q. Wu (Contact Author)

Indiana University - Kelley School of Business ( email )

Business 670
1309 E. Tenth Street
Bloomington, IN 47401
United States

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