Capital Structure and Corporate Failure Prediction: Theory and Applications

Journal of Economics and Business Vol. 5, No. 3, pp. 209-220, November 2011

20 Pages Posted: 3 Jan 2012 Last revised: 4 Jan 2012

Rowland Bismark Pasaribu

Gunadarma University; ABFI Institute Perbanas

Date Written: November 2, 2011

Abstract

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.

Keywords: default probabilities, capital structures, corporate failure, logistic regression

JEL Classification: G31, G32

Suggested Citation

Pasaribu, Rowland Bismark, Capital Structure and Corporate Failure Prediction: Theory and Applications (November 2, 2011). Journal of Economics and Business Vol. 5, No. 3, pp. 209-220, November 2011. Available at SSRN: https://ssrn.com/abstract=1978628

Rowland Bismark Pasaribu (Contact Author)

Gunadarma University ( email )

Margonda Raya 100
Pondokcina, Depok
Jakarta, West Java 62-16424
Indonesia

ABFI Institute Perbanas ( email )

Perbanas Street
Karet Kuningan, Setiabudi
Jakarta Selatan, DKI Jakarta 12940
Indonesia

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