Asset Selling Under Debt Obligations

Abstract

We extend the classical asset-selling problem to include debt repayment obligation, selling capacity constraint, and Markov price evolution. Specifically, we consider the problem of selling a divisible asset that is acquired through debt financing. The amount of asset that can be sold per period may be limited by physical constraints. The seller uses part of the sales revenue to repay the debt. If unable to pay off the debt, the seller must go bankrupt and liquidate the remaining asset. Our analysis reveals that in the presence of debt, the optimal asset-selling policy must take into account two opposing forces: an incentive to sell part of the asset early to secure debt payment and an incentive to delay selling the asset to capture revenue potential under limited liability. We analyze how these two forces, originating from debt financing, will distort the seller’s optimal policy.