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Market Implied Costs of Bankruptcy

57 Pages Posted: 12 Sep 2013 Last revised: 7 Jul 2017

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: June 1, 2017

Abstract

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

Reindl, Johann and Stoughton, Neal and Zechner, Josef, Market Implied Costs of Bankruptcy (June 1, 2017). 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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