Predicting Corporate Bankruptcy Using the Framework of Leland-Toft: Evidence From U.S.

Quantitative Finance, Forthcoming

53 Pages Posted: 4 Feb 2019 Last revised: 17 Jul 2019

See all articles by Christakis Charalambous

Christakis Charalambous

University of Cyprus - Department of Public and Business Administration

Spiros Martzoukos

University of Cyprus - Department of Public and Business Administration; George Washington University - School of Business

Zenon Taoushianis

University of Southampton - Department of Banking and Finance

Date Written: June 15, 2019

Abstract

In this paper, we evaluate an alternative approach for bankruptcy prediction that measures the financial healthiness of firms that have coupon-paying debts. The approach is based on the framework of Leland and Toft (1996), which is an extension of a widely-used model; the Black-Scholes-Merton model. Using U.S. public firms between 1995 and 2014, we show that the Leland-Toft approach is more powerful than Black-Scholes-Merton in a variety of tests. Moreover, extending popular but also contemporary corporate bankruptcy models with the probability of bankruptcy derived from the Leland-Toft model, such as Altman (1968), Ohlson (1980) and Campbell et al. (2008), yields models with improved performance. One of our tests, for example, shows that banks using these extended models, achieve superior economic performance relative to other banks. Our results are consistent under a comprehensive out-of-sample framework.

Keywords: Corporate Bankruptcy, Leland and Toft, Predictive Ability, Bank Performance

JEL Classification: C51, C52, G13, G33

Suggested Citation

Charalambous, Christakis and Martzoukos, Spiros Harilaos Spiridon and Taoushianis, Zenon, Predicting Corporate Bankruptcy Using the Framework of Leland-Toft: Evidence From U.S. (June 15, 2019). Quantitative Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3316105

Christakis Charalambous

University of Cyprus - Department of Public and Business Administration ( email )

75 Kallipoleos Street
P.O. Box 20537
Nicosia CY-1678
CYPRUS
00357-2-892258 (Phone)
00357-2-339063 (Fax)

Spiros Harilaos Spiridon Martzoukos

University of Cyprus - Department of Public and Business Administration ( email )

75 Kallipoleos Street
P.O. Box 20537
Nicosia CY-1678
CYPRUS
357-2-892474 (Phone)
357-2-892460 (Fax)

George Washington University - School of Business

Washington, DC 20052
United States
202-994-5996 (Phone)
202-994-5014 (Fax)

Zenon Taoushianis (Contact Author)

University of Southampton - Department of Banking and Finance ( email )

Southampton
United Kingdom

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