Revisiting the Asset Fire Sale Discount: Evidence from Commercial Aircraft Sales

Abstract

Using a sample of commercial aircraft transactions, the paper decomposes the raw fire sale discount on sales of aircraft by distressed airlines into three components: (i) quality impairment due to under-maintenance, (ii) misallocation to lower productivity users, and (iii) a liquidity component due to the immediacy of the sale. Results indicate that financially distressed airlines sell aircraft that have a lower life expectancy and lower productivity. We combine the two effects into a quality impairment adjustment that explains around one half of the raw liquidation discount. For the remaining discount of around 9%, we find no direct evidence of misallocation to lower productivity users and industry outsiders. Rather, the post-sale users of distressed aircraft have significantly higher productivity than the distressed sellers, while their productivity is similar to that of other (non-distressed) users. In summary, our results indicate that the inefficiencies associated with fire sales are likely to be lower than have been previously documented.