Crisis Interventions in Corporate Insolvency

By: Samuel Antill and Christopher Clayton

Format:Print
| Language:English
| Pages:92

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. (Revise & Resubmit, Journal of Finance.)