Fire Sales : Revisiting the Market Equilibrium Approach

I explore the impact of fire sales on welfare. Because they allocate assets according to financial muscle rather than real efficiency, they are usually seen as socially costly. Though I show the following irrelevance result: When firms are cashless and use industry-specific assets, the competitive equilibrium exhibits fire sales and though is socially optimal. By contrast, when cash-rich outsiders can acquire assets in the industry, firms hoard less liquidity and the asset resale price is lower than in the social optimum. Although too many assets are reallocated from efficient cash-poor firms towards inefficient cash-rich firms, restricting such asset transactions (for example with anti-takeover laws) makes a bad situation worse