Solvency Tests

Business Lawyer, Vol. 62, No. 3, 983-1006 (2007).

Posted: 19 Sep 2006 Last revised: 22 Nov 2020

Date Written: 2007


I explain the basic economic function of solvency tests and the relations among the three solvency tests applied in bankruptcy and corporate law. I also explain why solvency diagnoses can differ, depending on the test that is applied. While one of these tests - the ability to pay test - is probably best, it may suffer from significant measurement error in practice. Multiple solvency tests make sense because the costs of failing to detect insolvency when it exists exceed the costs of detecting insolvency when it does not exist.

Keywords: Insolvency, Bankruptcy, Fiduciary Duties, Creditors, Valuation

JEL Classification: G30, G33, K22

Suggested Citation

Heaton, J.B., Solvency Tests (2007). Business Lawyer, Vol. 62, No. 3, 983-1006 (2007)., Available at SSRN: or

J.B. Heaton (Contact Author)

One Hat Research LLC ( email )

1165 North Clark Street
7th Floor
Chicago, IL 60610
United States


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