Decomposing Fire Sale Discounts

Decomposing Fire Sale Discounts

Julian Franks, Gunjan Seth, Oren Sussman, Vikrant Vig

Series number :

Serial Number: 
722/2021

Date posted :

January 12 2021

Last revised :

January 18 2022
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Keywords

  • fire sale • 
  • Bankruptcy • 
  • under maintenance

The paper decomposes the raw fire sale discount into a quality component, a misallocation component, and  a  residual  liquidity  component.   We  find  that  distressed  airlines  under-maintain their  fleets  and,  this quality impairment explains half of the discount.  We find no evidence of misallocation to lower productivity users.  While the raw discounts are much larger for Chapter 7 tha

n Chapter 11 transactions, the difference is largely explained by longer periods of under-maintenance and consequently lower quality of aircraft sold in Chapter 7.  The evidence suggests that the magnitude of welfare losses associated with fire sales are likely to be overstated.

 

 

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Authors

Real name:
Gunjan Seth