Capital structure theories typically assume liquidation values are exogenous even though they may be determined in part by the debt choices of firms in the industry (Shleifer and Vishny, 1992; Pulvino, 1998). We develop a model in which high industry debt leads to a greater supply of assets for sale...

Firms with lower leverage are not only less likely to experience financial distress but are also better positioned to acquire assets from other distressed firms. With endogenous asset sales and values, each firm's debt choice then depends on the choices of its industry peers. With indivisible...

We develop a model in which the equilibrium returns of illiquid assets are determined by the debt capacity of arbitrageurs rather than the desire to smooth consumption shocks. Debt allows risk-neutral arbitrageurs to earn a spread between the asset's expected cash flow and its equilibrium price,...

In our model, financial firms' leverage choices and asset sales impose externalities on other financial firms. This means that individual firms cannot determine their optimal capitalizations in isolation, but have to take the aggregate financial sector characteristics into account. They become...