Explaining Debt Recovery Using an Endogenous Bankruptcy Model

31 Pages Posted: 1 Oct 2012 Last revised: 7 Oct 2013

See all articles by Wulin Suo

Wulin Suo

Queen's University - Smith School of Business

Wei Wang

Queen's University - Smith School of Business

Amber Qi Zhang

Queen's University

Multiple version iconThere are 2 versions of this paper

Date Written: May 1, 2013

Abstract

Drawing on a large sample of defaulted corporate debt from 1996 to 2007, we find that the debt recovery estimated using the Leland-Toft endogenous bankruptcy model has strong explanatory power on the debt recovery observed in the market. Our results hold after firm characteristics, industry distress, and macroeconomic conditions are taken into account. In addition, we find that both agency problems and heterogeneous bankruptcy costs weaken the explanatory power of the model. Our study suggests structural models that incorporate the role of managers in endogenously determining the bankruptcy boundary provide statistical power in explaining cross-sectional variation of corporate debt recovery.

Keywords: Bankruptcy, Debt Recovery, Structural Model, Bankruptcy Cost, Agency Conflict

JEL Classification: G33, G30

Suggested Citation

Suo, Wulin and Wang, Wei and Zhang, Amber Qi, Explaining Debt Recovery Using an Endogenous Bankruptcy Model (May 1, 2013). Midwest Finance Association 2013 Annual Meeting Paper. Available at SSRN: https://ssrn.com/abstract=2154725 or http://dx.doi.org/10.2139/ssrn.2154725

Wulin Suo

Queen's University - Smith School of Business ( email )

Smith School of Business - Queen's University
143 Union Street
Kingston, Ontario K7L 3N6
Canada

Wei Wang (Contact Author)

Queen's University - Smith School of Business ( email )

Queen's University-Smith School of Business
143 Union Street
Kingston, Ontario K7L 3N6
Canada

Amber Qi Zhang

Queen's University ( email )

Kingston, Ontario K7L 3N6
Canada

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