This paper investigates the interactions between preemptive competition and leverage. We find that the second mover always leaves the duopoly market before the first mover, although the leader may exit before the follower’s entry. We also see the leverage effects of debt financing increasing firm values and accelerating investment, even in the presence of preemptive competition. In addition to ...

This paper investigates the e¤ects on the asset market of bank actions in dealing with their non-performing loans. It is demonstrated that liquidation of bad loans may not be as detrimental to asset prices as commonly argued, because funds recouped from liquidation can be recycled into new loans which support the asset market. While capital regulation protects the health of banks, it may limit ...

This study evaluates the performance of feed-forward neural networks to model and forecast recovery rates of defaulted bank loans. In order to guarantee that the predictions are mapped into the unit interval, the neural networks are implemented with a logistic activation function in the output neuron. The statistical relevance of explanatory variables is assessed using the bootstrap technique. ...

Closed exchange and production-and-exchange economies may have multiple equilibria, a fact that is usually ignored in macroeconomic models. Our basic argument is that default and bankruptcy laws are required to prevent strategic default, and these laws can also serve to provide the conditions for uniqueness. In this paper we report experimental evidence on the effectiveness of this approach to ...

We analyze the risk implications of European bank consolidation on the probability of default of acquiring banks. Using the Merton distance to default model, we show that the average bank merger is risk neutral. We examine the extent to which merger motives linked to risk diversification and regulatory incentives explain the observed risk effects of M&A. However, we find only limited evidence c...

Closed exchange and production-and-exchange economies may have multiple equilibria, a fact that is usually ignored in macroeconomic models. Our basic argument is that default and bankruptcy laws are required to prevent strategic default, and these laws can also serve to provide the conditions for uniqueness. In this paper, we report experimental evidence on the effectiveness of this approach to...

In this paper we model the spillovers from the restructuring of a financially distressed firm on other firms and the feedback effects from the restructuring. Our results indicate that the spillover and feedback effects are complex and are determined by several factors including the level of information asymmetry regarding the restructuring firm, its direct bankruptcy cost, bankruptcy’s effect o...

There is a long normative ‘Social Contract’ tradition that attempts to characterize ex-post income inequalities that are agreeable to all ‘behind a veil of ignorance.’ This paper takes a similar normative approach to characterize social decision-making procedures. It is shown that quite generally some form of majority-voting is preferred to unanimity ‘behind a veil of ignorance’ whenever societ...

Article history: Received 24 November 2011 Received in revised form 9 August 2013 Accepted 13 August 2013 Available online 27 August 2013 I study firmswith past asbestos ties that suffer from significant increases in legal liabilities after a U.S. Supreme Court ruling in 1999. This event provides a natural experiment setting to estimate the indirect effects of financial distress on real activit...

We model the opacity of over-the-counter (OTC) markets in a setup where agents share risks, but have incentives to default and their financial positions are not mutually observable. We show that this setup results in excess “leverage” in that parties take on short OTC positions that lead to levels of default risk that are higher than Pareto-efficient ones. In particular, OTC markets feature a c...