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Investment Opportunities and Bankruptcy Prediction

42 Pages Posted: 22 Nov 2006 Last revised: 13 Mar 2013

Evgeny Lyandres

Boston University

Alexei Zhdanov

Pennsylvania State University

Date Written: 2007

Abstract

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.

Keywords: Growth options, Bankruptcy prediction, Default threhsold

JEL Classification: G33

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

Evgeny Lyandres (Contact Author)

Boston University ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States
617-3582279 (Phone)

Alexei Zhdanov

Pennsylvania State University ( email )

University Park
State College, PA 16802
United States

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

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