The Bright Side of Fire Sales

Abstract

Firms that buy distressed assets in fire sales earn excess returns that are two percentage points higher than in regular acquisitions. Returns are higher when the seller’s industry has fewer firms, is in poor financial health, and has less redeployable assets. This suggests that buyers can take advantage of fire sales by distressed companies needing to sell assets while restructuring, and that the overall welfare losses associated with fire sales are smaller than previously thought. These results have implications for policy makers evaluating the merits of bailouts as a tool to prevent potential welfare losses associated with fire sales.