Bankruptcy Prediction Using Only the Face Value of Debt and Stock Market Capitalization in a Single Ratio

16 Pages Posted: 17 Feb 2021

Date Written: January 25, 2021

Abstract

I show that a single ratio requiring only a public company's face value of debt and stock market capitalization is a robust bankruptcy predictor. I develop this ratio from a simple theory of the bankruptcy decision and denote it Ps, since it is the minimum price at which a firm's debt must trade if the firm is solvent. Used alone or in combination with other variables, Ps provides a useful tool for credit analysts, bankers, public accountants and others, and will be of considerable value in academic research on financial distress. I present bankruptcy frequencies for a range of Ps values to facilitate bankruptcy prediction by the reader.

Keywords: bankruptcy decision, financial distress, bankruptcy prediction

Suggested Citation

Heaton, J.B., Bankruptcy Prediction Using Only the Face Value of Debt and Stock Market Capitalization in a Single Ratio (January 25, 2021). Available at SSRN: https://ssrn.com/abstract=3773332 or http://dx.doi.org/10.2139/ssrn.3773332

J.B. Heaton (Contact Author)

One Hat Research LLC ( email )

Chicago, IL
United States
(312) 257-3900 (Phone)

HOME PAGE: http://www.onehatr.com/

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