Speaker: Neal Stoughton, Vienna Graduate School of Finance
Title: Market Implied Costs of Bankruptcy
Abstract: This paper takes a novel approach to estimating bankruptcy costs by inference from market prices of equity and put options using a dynamic structural model of capital structure. This approach avoids the selection bias of looking at ?rms in or near default and therefore permits theories of ex ante capital structure determination to be tested. We identify signi?cant cross sectional variation in bankruptcy costs across industries and relate these to speci?c ?rm characteristics. We ?nd that asset volatility and growth options have signi?cant positive impacts, while tangibility and size have negative impacts. Our bankruptcy cost variable estimate signi?cantly negatively impacts leverage ratios. This negative impact is in addition to that of other ?rm characteris?cs such as asset intangibility and asset volatility. The results provide strong support for the tradeo? theory of capital structure.