When Forced Sales Turn into Fire Sales
[Sponsored Article] Why and when do forced sales of assets result in discounts of “fire sale” proportions? Although it is known that fire sale discounts exist and can be substantial, it has been difficult to identify when forced sales result in fire sale discounts. Forced sales are typically triggered by industry-wide or asset-specific adverse shocks that affect both supply and demand for the particular asset. For instance, foreclosure and bankruptcy sales tend to occur when house prices fall, which makes it difficult to isolate the effect of forced sales on prices from the effect of the confounding shock. It is necessary to somehow separate supply and demand effects.

[Sponsored Article]
ANDERSEN, Steffen | NIELSEN, Kasper Meisner
Management Science 63 (1), 201-212. January 2017
Why and when do forced sales of assets result in discounts of “fire sale” proportions? Although it is known that fire sale discounts exist and can be substantial, it has been difficult to identify when forced sales result in fire sale discounts. Forced sales are typically triggered by industry-wide or asset-specific adverse shocks that affect both supply and demand for the particular asset. For instance, foreclosure and bankruptcy sales tend to occur when house prices fall, which makes it difficult to isolate the effect of forced sales on prices from the effect of the confounding shock. It is necessary to somehow separate supply and demand effects.
Steffen Andersen and Kasper Meisner Nielsen utilized the particular institutional setting surrounding inheritance cases in Denmark to investigate forced sales turning into fire sales. Their “natural experiment” examined sales of property resulting from the sudden deaths of house owners. The Danish Inheritance Act requires estates to be settled in probate court within 12 months of the death. As a result, the suddenly deceased’s house is either forced to be sold or forced to be transferred to beneficiaries.
These circumstances provided the researchers with a random draw of house owners, ensuring that individual and house characteristics were exogenous. Second, forced sales due to sudden deaths are unrelated to the current supply and demand for houses, allowing Andersen and Nielsen to identify market conditions under which forced sales occur at fire sale discounts. Third, because of the 12-month deadline, they were able to identify urgent sales. Collectively, these attributes ensured that sales in the sample were triggered by unanticipated events, allowing them to identity when forced sales led to fire sales discounts. In comparison, prior literature has estimated the discount on forced sales as the result of financial distress, mutual fund outflows, bankruptcy or foreclosure.