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Investment Opportunities and Bankruptcy Prediction

Evgeny Lyandres

Boston University; Interdisciplinary Center (IDC) Herzliyah

Alexei Zhdanov

Pennsylvania State University


Journal of Financial Markets, Forthcoming

A firm's mix of growth options and assets in place is an important determinant of its optimal default strategy. Our simple model shows that shareholders of a firm with valuable investment opportunities would be able/willing to wait longer before defaulting on their contractual debt obligations than shareholders of an otherwise identical firm without such opportunities. More importantly, we show empirically using a dataset of recent corporate bankruptcies that measures of investment opportunities are significantly related to bankruptcy. Augmenting existing bankruptcy prediction models by these measures improves their in-sample fit and out-of-sample forecasting ability.

Number of Pages in PDF File: 42

Keywords: Growth options, Bankruptcy prediction, Default threhsold

JEL Classification: G33

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Date posted: November 22, 2006 ; Last revised: March 13, 2013

Suggested Citation

Lyandres, Evgeny and Zhdanov, Alexei, Investment Opportunities and Bankruptcy Prediction (2007). Journal of Financial Markets, Forthcoming. Available at SSRN: https://ssrn.com/abstract=946240 or http://dx.doi.org/10.2139/ssrn.946240

Contact Information

Evgeny Lyandres (Contact Author)
Boston University ( email )
595 Commonwealth Avenue
Boston, MA 02215
United States
617-3582279 (Phone)
Interdisciplinary Center (IDC) Herzliyah ( email )
P.O. Box 167
Herzliya, 46150
Alexei Zhdanov
Pennsylvania State University ( email )
University Park
State College, PA 16802
United States
HOME PAGE: http://www.alexeizhdanov.com
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References:  43
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