The Role of Asset Payouts in the Estimation of Default Barriers

38 Pages Posted: 1 Feb 2021

See all articles by Alexandros Bougias

Alexandros Bougias

Athens University of Economics and Business - Department of Accounting and Finance

Athanasios Episcopos

Athens University of Economics and Business - Department of Accounting and Finance

George N. Leledakis

Athens University of Economics and Business - Department of Accounting and Finance

Date Written: January 2021

Abstract

In the barrier option model of corporate security valuation, the firm's creditors impose a default-triggering barrier on the firm value to protect their claim. One of the disputed issues in the literature is whether the implied default barrier is positive, and whether it is above or below the firm's leverage. We extend the model of Brockman and Turtle by embedding asset payouts in the valuation of shareholder's equity. Using a sample of US stocks from the NYSE, AMEX, and NASDAQ, our paper exploits market and firm information to arrive at more accurate estimates of the parameters. The implied default barrier is computed for thirty 2-digit SIC groups, including industrials and banks. Our results show that the implied default barrier is lower than it is in the received literature, and it can be less than leverage, even zero for some firms. The implied physical probabilities of default are significantly lower in the presence of payouts, providing a closer fit to the historical corporate default rates, particularly for issuers of speculative-grade bonds.

Keywords: Contingent Claims, Barrier Option, Issuer Credit Ratings, Default Barrier

JEL Classification: G12, G33, G28

Suggested Citation

Bougias, Alexandros and Episcopos, Athanasios and Leledakis, George N., The Role of Asset Payouts in the Estimation of Default Barriers (January 2021). Available at SSRN: https://ssrn.com/abstract=3761957 or http://dx.doi.org/10.2139/ssrn.3761957

Alexandros Bougias

Athens University of Economics and Business - Department of Accounting and Finance ( email )

76 Patission Street
GR-104 34 Athens
Greece

Athanasios Episcopos (Contact Author)

Athens University of Economics and Business - Department of Accounting and Finance ( email )

76 Patission Street
GR-104 34 Athens
Greece
+30 21 0820 3364 (Phone)
+30 21 0822 8816 (Fax)

HOME PAGE: http://www.aueb.gr/users/episcopos

George N. Leledakis

Athens University of Economics and Business - Department of Accounting and Finance ( email )

76 Patission Street
GR-104 34 Athens
Greece
+30 210 8203 459 (Phone)
+30 210 8228 816 (Fax)

HOME PAGE: http://www.aueb.gr/en/faculty_page/leledakis-georgios

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