This study examines the relationship between product differentiation and financial leverage. It argues that product differentiation is associated with investments in firm-specific assets that have lower liquidation value than general assets. Debt investors need to charge a higher interest rate to cover the risk of default, making the firm resort to equity financing and resulting in low financia...

Turmoil in financial markets is often accompanied by a significant decrease in market liquidity. Here, we investigate how such key risk measures as likelihood of insolvency, value at risk, and expected tail loss respond to bid– ask spreads that are likely to widen just when positions must be liquidated to maintain capital ratios. Our results show that this sort of illiquidity causes significant...

In a long-term contract with moral hazard, the liquidation of the firm can arise as the outcome of the optimal contract. However, if the future production capability or market opportunities remain unchanged, liquidation may not be free from renegotiation. Will the firm ever be liquidated if we allow for renegotiation? This paper shows that the firm can still be liquidated even though liquidatio...

The seniority of employees’ claims in the liquidation of insolvent firms, and their rights in the renegotiation of their debt varies greatly across countries. Using a simple model of strategic leverage, we show that the balance between these rights of employees and those of other creditors affects the strategic value of debt: in equilibrium, stronger employees’ seniority rights in bankruptcy li...

Several empirical studies have supported the hypothesis that bank relationships have economic value. By examining the effect of a Japanese bank failure on the profitability of client firms, this paper shows that the impact of a bank failure on clients depends on clients depends on the client’s characteristics and the method of bank liquidation, and that the value of bank relationships has been ...

This work is concerned with an optimal selling rule for a large position of stock in a market. Selling a large block of stock in a short period typically depresses the market, which would result in a poor filling price. In addition, the large selling intensity makes the regime more likely to be poor state in the market. In this paper, regime switching and depressing terms associated with sellin...

It has been argued that when management is more concerned with the firm’s survival than with profitability, it is efficient to use a levered capital structure and thereby commit to the transfer of the liquidation decision to lenders. Our paper analyzes this view in a setting where lenders may behave opportunistically when they control the liquidation decision — i.e., when there is a lender hold...

We analyze optimal risk management strategies of a bank financed with deposits and equity in a one period model. The bank’s motivation for risk management comes from deposits which can lead to bank runs. In the event of such a run, liquidation costs arise. The hedging strategy that maximizes the value of equity is derived. We identify conditions under which well known results such as complete h...

We study the optimal behaviour of a firm whose cash holdings are determined by a diffusion process and which is faced with the threat of liquidation if internal cash balances fall below some threshold. There is a conflict between the desire to pay out cash as dividends to satisfy relatively impatient shareholders and the need to retain cash as a barrier against possible liquidation (and consequ...