Evidence on Indirect Bankruptcy Costs: Liquidation Rates, Opportunity Costs, and the Value of Intertemporal Asset Storage

Abstract

The present paper examines bankrupt firm liquidation data with duration, OLS and three-stage least squares models to estimate the costs and benefits of bankruptcy liquidation delays. The paper uses Federal Deposit Insurance Corporation data on failed banks to estimate net present value maximizing liquidation strategies while keeping holdout effects, forum shopping, and debt renegotiation constant. Lengthy liquidations can impose high opportunity costs, but these costs can be substantially mitigated by asset appreciation over the liquidation period. Therefore it is important to simultaneously weigh the costs and benefits of delay. The NPV-maximizing liquidation strategy may therefore not always be the fastest.