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A Real Options Approach to Bankruptcy Costs: Evidence from Failed Commercial Banks During the 1990s

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  • Joseph R. Mason

    (Drexel University and Wharton Financial Institutions Center)

Abstract

Literature identifies three main aspects of liquidation costs: firm size, asset specificity, and industry concentration. This paper unifies the theory behind these aspects of bankruptcy costs by treating them as components of a broader option valuation problem faced by the liquidating trustee. Testing the hypothesized asset price relationships on FDIC failed-bank liquidation data yields the appropriate results. Furthermore, it appears that liquidation time alone can be used as an effective second-order proxy for asset value growth where market value estimates are unavailable.

Suggested Citation

  • Joseph R. Mason, 2005. "A Real Options Approach to Bankruptcy Costs: Evidence from Failed Commercial Banks During the 1990s," The Journal of Business, University of Chicago Press, vol. 78(4), pages 1523-1554, July.
    • Handle: RePEc:ucp:jnlbus:v:78:y:2005:i:4:p:1523-1554
    DOI: 10.1086/430868
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    Cited by:

    1. Tchana Tchana, Fulbert, 2012. "The welfare cost of banking regulation," Economic Modelling, Elsevier, vol. 29(2), pages 217-232.
    2. Lee, Seung-Hyun & Yamakawa, Yasuhiro & Peng, Mike W. & Barney, Jay B., 2011. "How do bankruptcy laws affect entrepreneurship development around the world?," Journal of Business Venturing, Elsevier, vol. 26(5), pages 505-520, September.
    3. Nishihara, Michi & Shibata, Takashi, 2018. "Dynamic bankruptcy procedure with asymmetric information between insiders and outsiders," Journal of Economic Dynamics and Control, Elsevier, vol. 90(C), pages 118-137.
    4. Cangemi, Robert R. & Mason, Joseph R. & Pagano, Michael S., 2012. "Options-based structural model estimation of bond recovery rates," Journal of Financial Intermediation, Elsevier, vol. 21(3), pages 473-506.
    5. Kang, Tong Hyouk & James, Sharon D. & Fabian, Frances, 2020. "Real options and strategic bankruptcy," Journal of Business Research, Elsevier, vol. 117(C), pages 152-162.
    6. Mike W. Peng & Yasuhiro Yamakawa & Seung–Hyun Lee, 2010. "Bankruptcy Laws and Entrepreneur– Friendliness," Entrepreneurship Theory and Practice, , vol. 34(3), pages 517-530, May.
    7. Mr. Daniel C Hardy, 2013. "Bank Resolution Costs, Depositor Preference, and Asset Encumbrance," IMF Working Papers 2013/172, International Monetary Fund.

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