Market Implied Costs of Bankruptcy

51 Pages Posted: 12 Sep 2013 Last revised: 18 Oct 2016

Johann Reindl

BI Norwegian Business School

Neal Stoughton

Vienna University of Economics and Business; Vienna Graduate School of Finance (VGSF)

Josef Zechner

Vienna University of Economics and Business

Date Written: August 1, 2016

Abstract

This paper examines bankruptcy costs using market prices of equity and put options during the financial crisis. Our approach avoids the usual selection bias and does not require the optimal tradeoff theory of capital structure to hold. We therefore can test this theory and we find strong support. We also identify significant variation in bankruptcy costs across and within industries and relate these to specific firm characteristics. Asset volatility, growth options, and labor intensity have significant positive impacts to bankruptcy costs, while tangibility, size, weak corporate governance, entrenched management, defined benefit pension plans, and inefficient asset utilization have negative impacts.

Keywords: bankruptcy costs, capital structure, default, equity prices

JEL Classification: G33, G30, G32

Suggested Citation

Reindl, Johann and Stoughton, Neal and Zechner, Josef, Market Implied Costs of Bankruptcy (August 1, 2016). Available at SSRN: https://ssrn.com/abstract=2324097 or http://dx.doi.org/10.2139/ssrn.2324097

Johann Reindl

BI Norwegian Business School ( email )

Nydalsveien 37
Oslo, 0442
Norway

HOME PAGE: johann.reindl@vgsf.ac.at

Neal M. Stoughton (Contact Author)

Vienna University of Economics and Business ( email )

Austria

Vienna Graduate School of Finance (VGSF) ( email )

Austria

Josef Zechner

Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, Wien A-1019
Austria

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