Market Implied Costs of Bankruptcy
57 Pages Posted: 12 Sep 2013 Last revised: 7 Jul 2017
Date Written: June 1, 2017
This paper examines bankruptcy costs using market prices of equity and put options during the financial crisis. Our approach avoids the downward selection bias and the upward bias when using the tradeoff theory to estimate bankruptcy costs. While the average bankruptcy cost is about 20%, we find wide variation across and within industries. Costs are related positively to asset volatility, growth options, and labor intensity and negatively to tangibility, size, weak corporate governance and entrenched management. Using our results we also find strong support for the tradeoff theory but we identify the other firm characteristics that also matter.
Keywords: bankruptcy costs, capital structure, default, equity prices
JEL Classification: G33, G30, G32
Suggested Citation: Suggested Citation