Decomposing Fire Sale Discounts

74 Pages Posted: 12 Jan 2021 Last revised: 16 May 2022

See all articles by Julian R. Franks

Julian R. Franks

London Business School - Institute of Finance and Accounting; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Gunjan Seth

London Business School

Oren Sussman

European Corporate Governance Institute (ECGI)

Vikrant Vig

London Business School

Date Written: May 1, 2022

Abstract

The paper decomposes the raw fire sale discount into a quality component, a misallocation component, and a residual liquidity component. We find that distressed airlines under-maintain their fleets and, this quality impairment explains half of the discount. We find no evidence of misallocation to lower productivity users. While the raw discounts are much larger for Chapter 7 than Chapter 11 transactions, the difference is largely explained by longer periods of under-maintenance and consequently lower quality of aircraft sold in Chapter 7. The evidence suggests that the magnitude of welfare losses associated with fire sales are likely to be overstated.

Keywords: fire sale, bankruptcy, under maintenance

JEL Classification: G33, D24, L93

Suggested Citation

Franks, Julian R. and Seth, Gunjan and Sussman, Oren and Vig, Vikrant, Decomposing Fire Sale Discounts (May 1, 2022). European Corporate Governance Institute – Finance Working Paper No. 722/2021, Available at SSRN: https://ssrn.com/abstract=3763826 or http://dx.doi.org/10.2139/ssrn.3763826

Julian R. Franks (Contact Author)

London Business School - Institute of Finance and Accounting ( email )

Institute of Finance and Accounting
Sussex Place - Regent's Park
London NW1 4SA
United Kingdom
+44 20 7262 5050 x3449 (Phone)
+44 20 7724 3317 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

HOME PAGE: https://ecgi.global/

Gunjan Seth

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

Oren Sussman

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Vikrant Vig

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

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