Market Implied Costs of Bankruptcy

Reindl, Johann; Stoughton, Neal M.; Zechner, Josef

doi:10.2139/ssrn.2324097

Cited by 14 publications

(11 citation statements)

References 60 publications

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“…Lastly, interestingly, the estimates imply that firm size is a strong positive proxy for α and this is inconsistent with some previous findings (Reindl, Stoughton and Zechner, 2017).…”

Section: Empirical Proxies For Shareholders' Recovery Ratecontrasting

confidence: 99%

“…Consistent with some findings (Reindl, Stoughton and Zechner, 2017), this variable captures how non-transferable a firm's asset might be in default and thus is positively related to α.…”

Section: Empirical Proxies For Shareholders' Recovery Ratesupporting

confidence: 82%

“…When shareholders recover zero amount in default, shareholders might not be able to strategically default at the optimal default threshold due to debt covenants (Reindl, Stoughton and Zechner, 2017). Yet, when shareholders are allowed to receive a positive payoff in default, such debt covenants can be easily described with my current model and shareholders will behave as if shareholders strategically default.…”

Section: Setup and Solutionmentioning

confidence: 99%

“…More recently, by using a model that forces firms to roll over a fixed fraction of debt, Reindl, Stoughton and Zechner (2017) estimate default cost to be 20%. Although Reindl et al's estimate is similar to mine, we differ in a few major areas.…”

Section: Introductionmentioning

confidence: 99%

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Shareholder Recovery and Leverage

Kim

2018

SSRN Journal

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“…Lastly, interestingly, the estimates imply that firm size is a strong positive proxy for α and this is inconsistent with some previous findings (Reindl, Stoughton and Zechner, 2017).…”

Section: Empirical Proxies For Shareholders' Recovery Ratecontrasting

confidence: 99%

“…Consistent with some findings (Reindl, Stoughton and Zechner, 2017), this variable captures how non-transferable a firm's asset might be in default and thus is positively related to α.…”

Section: Empirical Proxies For Shareholders' Recovery Ratesupporting

confidence: 82%

Section: Setup and Solutionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

See 2 more Smart Citations

Shareholder Recovery and Leverage

Kim

2018

SSRN Journal

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“…The expected value of this loss takes the name of expected bankruptcy costs ( ). Reindl, Stoughton, and Zechner (2013) and Glover (2018) provide recent estimates of bankruptcy costs and show these might be considerably relevant. The introduction of debt financing may also affect investment decisions and in turn the value of growth options, as found by Myers (1977) and Jensen and Meckling (1976).…”

Section: Valuation and Implied Cost Of Capitalmentioning

confidence: 99%

The Small-Sized Premium: Is It Really Relevant? Evidence from the European Equity Market

Camodeca

Prinoth

Sagliaschi

2020

AFR

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The valuation of a company reflects the expected return or equivalently, the cost of capital that investors demand in exchange for the risk assumed. Despite the ex-ante nature of the problem, the majority of empirical analysis has focused on factors explaining expected returns from an ex-post perspective. In this paper, we take a different approach and try to identify which factors are ex-ante included in discount rates, with particular attention to the so-called size premium. Starting from observed market capitalisations and company fundamentals, we obtain the implied cost of capital from the reverse engineering of a carefully designed fundamental valuation model. Panel data regressions are used to investigate the existence of a relation between the implied cost of capital and the firm’s size, including other control variables representative of the most cited asset pricing “anomalies”. Our sample comprises European non-financial stocks listed on primary markets, with half-yearly observations starting from the aftermath of the 2008 global financial crisis. Contrary to common wisdom, we find that the firm’s size has no tangible impact to explain the implied cost of capital.

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Debt Maturity and the Dynamics of Leverage

Dangl

Zechner

2021

The Review of Financial Studies

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This paper shows that short debt maturities commit equityholders to leverage reductions when refinancing expiring debt in low-profitability states. However, shorter maturities lead to higher transaction costs since larger amounts of expiring debt need to be refinanced. We show that this trade-off between higher expected transaction costs against the commitment to reduce leverage in low-profitability states motivates an optimal maturity structure of corporate debt. Since firms with high costs of financial distress and risky cash flows benefit most from committing to leverage reductions, they have a stronger motive to issue short-term debt. Evidence supports the model’s predictions.

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Market Implied Costs of Bankruptcy

Cited by 14 publications

References 60 publications

Shareholder Recovery and Leverage

Shareholder Recovery and Leverage

The Small-Sized Premium: Is It Really Relevant? Evidence from the European Equity Market

Debt Maturity and the Dynamics of Leverage

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