Nondiscriminating Foreclosure and Voluntary Liquidating Costs

Authors: Ko Wang; Leslie Young; Yuqing Zhou

Source: Review of Financial Studies, Volume 15, Number 3, 1 March 2002 , pp. 959-985(27)

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Abstract:

Since liquidation and bankruptcy are costly, researchers have tried to find out why the claimants of a troubled firm do not work out a deal to avoid these costs. In this article we show that if a creditor has to deal with multiple borrowers who might default, it may be optimal for the creditor to randomly reject requests for a loan workout. We further demonstrate that the optimal acceptance rate used by a creditor is positively related to the liquidating cost and negatively related to the default benefit. Our model is particularly relevant when analyzing the default decisions of mortgage borrowers and small business owners.

Document Type: Research article

Publication date: 2002-03-01

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The Review of Financial Studies is a major forum for the promotion and wide dissemination of significant new research in financial economics. As reflected by its broadly based editorial board, the Review balances theoretical and empirical contributions. The primary criteria for publishing a paper are its quality and importance to the field of finance, without undue regard to its technical difficulty. Finance is interpreted broadly to include the interface between finance and economics. The Review is sponsored by The Society for Financial Studies. The editors of the Review and officers of the Society are elected for limited terms.