Illiquidity and Under-Valuation of Firms

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dc.contributor.author GALE, Douglas
dc.contributor.author GOTTARDI, Piero
dc.date.accessioned 2009-10-20T13:53:23Z
dc.date.available 2009-10-20T13:53:23Z
dc.date.issued 2009
dc.identifier.issn 1725-6704
dc.identifier.uri http://hdl.handle.net/1814/12695
dc.description.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 .rms.investment decisions. We characterize the conditions under which fire sales occur in equilibrium and their consequences on .rms.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. en
dc.language.iso en en
dc.relation.ispartofseries EUI ECO en
dc.relation.ispartofseries 2009/38 en
dc.subject illiquid markets en
dc.subject default en
dc.subject incomplete markets en
dc.subject price distortions en
dc.subject inefficient investment en
dc.subject D5 en
dc.subject D8 en
dc.subject G1 en
dc.subject G33 en
dc.title Illiquidity and Under-Valuation of Firms en
dc.type Working Paper en
dc.neeo.contributor GALE|Douglas|aut|
dc.neeo.contributor GOTTARDI|Piero|aut|EUI70004
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