Capital Structure and Corporate Failure Prediction: Theory and Applications
Rowland Bismark Pasaribu
Gunadarma University; ABFI Institute Perbanas
November 2, 2011
Journal of Economics and Business Vol. 5, No. 3, pp. 209-220, November 2011
This paper addresses the theoretical foundations of corporate failure prediction, using the neo-classical theory of capital structure as a starting point. The paper intends to demonstrate the feasibility of such an approach in a simple setting, i.e. by using a simple theoretical model and a limited empirical analysis. A model of optimal capital structure is constructed and rewritten as a model of default probability. Its empirical implications are derived and tested on a sample of Indonesian data. It is concluded that this approach clearly has its limitations, but also that may it be a valuable contribution compared to the multitude of theory-less empirical studies and a useful alternative to the default theory.
Number of Pages in PDF File: 20
Keywords: default probabilities, capital structures, corporate failure, logistic regression
JEL Classification: G31, G32
Date posted: January 3, 2012 ; Last revised: January 4, 2012
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