Why Fire Sale Discounts are Overstated: A Study of Misallocation and Productivity in Distressed Airlines

The paper measures two potential inefficiencies associated with sales made by distressed airlines: fire sale discounts and resource misallocation. We find evidence that fire sale discounts are significantly overstated in prior literature because distressed airlines under-maintain their fleets and, this quality impairment explains half of the discount. We document that the bankruptcy process allows reallocation of distressed aircraft to high productivity operators, suggesting a cleansing rather than a misallocation effect. While raw fire sale discounts are much higher for Chapter 7 than Chapter 11 transactions, virtually the entire difference is explained by the lower quality of aircraft sold in Chapter 7. The results suggest that the welfare costs associated with fire sales might be significantly lower than those documented in prior studies.

Zoom link: https://eur-nl.zoom.us/j/94585658376?pwd=bnFMS0JxNGJtd1BVaUgwME9JSDBoZz09

Meeting ID: 945 8565 8376