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  • 2021
  • Working Paper

Crisis Interventions in Corporate Insolvency

By: Samuel Antill and Christopher Clayton
  • Format:Print
  • | Language:English
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Abstract

We model the optimal resolution of insolvent firms in general equilibrium. Absent externalities, the optimal corporate-insolvency system encourages lending by letting banks assign liquidations ex-post. We show that a social planner optimally intervenes in such a system during a crisis because of two pecuniary externalities. First, liquidation waves create fire-sale discounts, motivating a subsidy for liquidation-preventing loans to insolvent firms. However, a loan-price externality arises when collateral-constrained banks allocate scarce capital to averting liquidations rather than bolstering healthier firms, motivating a subsidy for liquidating insolvent firms. Efficient intervention can thus encourage or discourage liquidation, depending on the crisis. Our model sheds light on recent crisis-motivated policy proposals.

Keywords

Insolvent Firms; Government Intervention; Liquidation; Econometric Models; Insolvency and Bankruptcy; Governance; Policy

Citation

Antill, Samuel, and Christopher Clayton. "Crisis Interventions in Corporate Insolvency." Working Paper, February 2021.
  • SSRN

About The Author

Samuel B. Antill

Finance
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