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The Financing and Redeployment of Specific Assets

Authors

  • Michel A. Habib,

    1. London Business School
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  • D. Bruce Johnsen

    1. George Mason University School of Law
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    • * Assistant Professor of Finance, London Business School, and Associate Professor of Law, George Mason University School of Law, respectively. For helpful comments and encouragement on earlier drafts, we thank the anonymous referee for the Journal, Rene Stulz (the editor), Franklin Allen, Patrick Bolton, Jim Bowers, Richard Brealey, Michael Brennan, Ian Cooper, Leonardo Felli, Julian Franks, Gary Gorton, Denis Gromb, Saul Levmore, Dean Lueck, Ernst Maug, Antonio Mello, Narayan Naik, Maureen O'Hara, Jacques Olivier, Mitchell Petersen, Richard Smith, Ivo Welch, Josef Zechner, and seminar participants at City University Business School, the University of Kansas Business School, the London Business School, the London School of Economics, the Stockholm School of Economics, Universitat Pompeu Fabra, the 1995 annual meetings of the Western Economic Association, and the 1996 European Summer Symposium in Financial Markets. All errors are our own.

Abstract

We model the role various forms of nonrecourse secured debt play in efficiently redeploying assets whose value is state-specific. Ex ante, an entrepreneur and an asset redeployer make noncontractible state-specific investments in the primary and next-best uses of an asset, respectively. The redeployer provides a secured nonrecourse loan equal to the value of the asset in the critical state that separates the good and bad states. In the event of a bad state, this contract averts ex post bargaining over the asset's quasi-rents on redeployment and leaves the parties' ex ante investments undistorted.

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