Revisiting the Asset Fire Sale Discount: Evidence from Commercial Aircraft Sales

72 Pages Posted: 12 Jan 2021

See all articles by Julian R. Franks

Julian R. Franks

London Business School - Institute of Finance and Accounting; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Gunjan Seth

London Business School

Oren Sussman

European Corporate Governance Institute (ECGI); University of Oxford - Said Business School; Ben-Gurion University of the Negev; University of London; University of Oxford - Said Business School

Vikrant Vig

London Business School

Date Written: December 28, 2020

Abstract

Using a sample of commercial aircraft transactions, the paper decomposes the raw fire sale discount on sales of aircraft by distressed airlines into three components: (i) quality impairment due to under-maintenance, (ii) misallocation to lower productivity users, and (iii) a liquidity component due to the immediacy of the sale. Results indicate that financially distressed airlines sell aircraft that have a lower life expectancy and lower productivity. We combine the two effects into a quality impairment adjustment that explains around one half of the raw liquidation discount. For the remaining discount of around 9%, we find no direct evidence of misallocation to lower productivity users and industry outsiders. Rather, the post-sale users of distressed aircraft have significantly higher productivity than the distressed sellers, while their productivity is similar to that of other (non-distressed) users. In summary, our results indicate that the inefficiencies associated with fire sales are likely to be lower than have been previously documented.

Keywords: fire sale, bankruptcy, under maintenance

JEL Classification: G33, D24, L93

Suggested Citation

Franks, Julian R. and Seth, Gunjan and Sussman, Oren and Vig, Vikrant, Revisiting the Asset Fire Sale Discount: Evidence from Commercial Aircraft Sales (December 28, 2020). European Corporate Governance Institute – Finance Working Paper No. 722/2021, Available at SSRN: https://ssrn.com/abstract=3763826 or http://dx.doi.org/10.2139/ssrn.3763826

Julian R. Franks (Contact Author)

London Business School - Institute of Finance and Accounting ( email )

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Centre for Economic Policy Research (CEPR)

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European Corporate Governance Institute (ECGI)

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Gunjan Seth

London Business School ( email )

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Oren Sussman

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
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Belgium

University of Oxford - Said Business School ( email )

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Ben-Gurion University of the Negev

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University of London ( email )

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University of Oxford - Said Business School ( email )

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Great Britain
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+44 1865 288 805 (Fax)

Vikrant Vig

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

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