Abstract

http://ssrn.com/abstract=1892480
 
 

References (43)



 
 

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Are Corporate Default Probabilities Consistent with the Static Tradeoff Theory?


Armen Hovakimian


Baruch College - Zicklin School of Business

Ayla Kayhan


Louisiana State University

Sheridan Titman


University of Texas at Austin - Department of Finance; National Bureau of Economic Research (NBER)

June 1, 2011


Abstract:     
Probability of default plays a central role in the static tradeoff theory of capital structure. We provide a direct test of this theory by regressing the probability of default, measured by S&P credit ratings and Moody’s KMV Expected Default FrequencyTM (EDFTM), on firm characteristics that proxy for the costs of bankruptcy and the tax benefits of debt. Contrary to predictions of the theory, firms with high bankruptcy costs, that is smaller firms and firms with lower asset tangibility, choose capital structures with higher bankruptcy risk. Further analysis suggests that the capital structures of smaller firms with lower asset tangibility, which tend to have less access to capital markets, are more sensitive to negative profitability and equity value shocks, making them more sensitive to bankruptcy risk.

Number of Pages in PDF File: 38

Keywords: capital structure, tradeoff theory, default probability

JEL Classification: G32

working papers series





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Date posted: July 22, 2011  

Suggested Citation

Hovakimian, Armen and Kayhan, Ayla and Titman, Sheridan, Are Corporate Default Probabilities Consistent with the Static Tradeoff Theory? (June 1, 2011). Available at SSRN: http://ssrn.com/abstract=1892480 or http://dx.doi.org/10.2139/ssrn.1892480

Contact Information

Armen Hovakimian (Contact Author)
Baruch College - Zicklin School of Business ( email )
One Bernard Baruch Way
Box B10-225
New York, NY 10010
United States
646-312-3490 (Phone)
646-312-3451 (Fax)
HOME PAGE: http://faculty.baruch.cuny.edu/ahovakimian/
Ayla Kayhan
Louisiana State University ( email )
E. J. Ourso School of Business
Department of Finance
Baton Rouge, LA 70803
United States
HOME PAGE: http://faculty.bus.lsu.edu/akayhan/index.htm
Sheridan Titman
University of Texas at Austin - Department of Finance ( email )
Red McCombs School of Business
Austin, TX 78712
United States
512-232-2787 (Phone)
512-471-5073 (Fax)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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