How Long Do Junk Bonds Spend in Default?
Posted: 3 Nov 1998
Jensen (1989, 1991) hypothesized that highly leveraged firms would easily renegotiate their debts in the event of financial distress because of the high going-concern value that their debt claimants would like to preserve. This paper is an examination of the factors affecting the length of time junk bonds spend in default. Of particular interest is whether firms with high operating earnings, but insufficient funds for debt service, have shorter default durations than other distressed firms. The effects of these factors are estimated with a Cox regression on a sample of original-issue high yield bonds that defaulted between 1980 and 1991. The results suggest that LBOs do spend less time in default than other issuers, but firm value appears to have no explanatory power in the estimations of default spells. Other factors affecting the duration of default spells are size, the use of speculative-grade public bond financing, environmental liabilities, underfunded pensions and fraudulent conveyance lawsuits.
JEL Classification: G33
Suggested Citation: Suggested Citation