|
EconStor >
ifo Institut – Leibniz-Institut für Wirtschaftsforschung an der Universität München >
CESifo Working Papers, CESifo Group Munich >
Please use this identifier to cite or link to this item:
http://hdl.handle.net/10419/30550
|
| | |
| Title: | | Illiquidity and under-valuation of firms  |
| Authors: | | Gale, Douglas Gottardi, Piero |
| Issue Date: | | 2009 |
| Series/Report no.: | | CESifo working paper 2900 |
| Abstract: | | We study a competitive model in which market incompleteness implies that debt-financed firms may default in some states of nature and default may lead to the sale of the firms’ assets at fire sale prices when markets are illiquid. This incompleteness is the only friction in the model and the only cost of default. The anticipation of such losses alone may distort firms’ investment decisions. We characterize the conditions under which fire sales occur in equilibrium and their consequences on firms’ investment decisions. We also show that endogenous financial crises may arise in this environment, with asset prices collapsing as a result of pure self-fulfilling beliefs. Finally, we examine alternative interventions to restore the efficiency of equilibria. |
| Subjects: | | illiquid markets default incomplete markets price distortions inefficient investment |
| JEL: | | D50 D80 G10 G33 |
| Document Type: | | Working Paper |
| Appears in Collections: | | CESifo Working Papers, CESifo Group Munich
|
| |
| | |
Download bibliographical data as:
BibTeX
|
| |
Share on:http://hdl.handle.net/10419/30550
|
Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.
|