Investment Opportunities and Bankruptcy Prediction

42 Pages Posted: 22 Nov 2006 Last revised: 19 Apr 2018

See all articles by Evgeny Lyandres

Evgeny Lyandres

Tel Aviv University

Alexei Zhdanov

Pennsylvania State University

Date Written: 2014


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 (2014). Journal of Financial Markets, 16 (3), 439-476, Available at SSRN: or

Evgeny Lyandres (Contact Author)

Tel Aviv University ( email )

Ramat Aviv
Tel-Aviv, 6997801
6400241 (Fax)

Alexei Zhdanov

Pennsylvania State University ( email )

University Park
State College, PA 16802
United States


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