Macroeconomic Effects of Delayed Capital Liquidation

Abstract This paper studies the macroeconomic effects of capital reallocation with financial shocks. I develop a model in which firms face borrowing constraints, idiosyncratic productivity shocks, and liquidation costs. The risks costs generate an option value staying business delay for unproductive firms. A new feature arises from delay. Unproductive that are not liquidated increase their leverage over time, pushing them to hit limit. show adverse shocks tighten constraints can raise value, equilibrium further reallocation. Capital is thus persistently misallocated, leading long-lasting economic contractions.