Some Estimates of Direct and Indirect Bankruptcy Costs in Australia: September 1978–May 1983

T. Pham and D. Chow
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T. Pham: School of Banking and Finance, The University of New South Wales, Kensington.
D. Chow: Kuala Lumpur, Malaysia.

Australian Journal of Management, 1989, vol. 14, issue 1, 75-95

Abstract: This study estimates some direct and indirect costs of bankruptcy in the Australian context from September 1978 to May 1983. The findings are: first, there was some degree of capital market inefficiency in the processing of infor Mation relevant to the bankrupt firms; second, bankruptcy costs, in particular indirect costs, were sizeable, approximately over 20% of firm's value; third, the expected present value of bankruptcy costs greatly exceeded the tax benefits from leverage for thirteen of the fourteen firms under study; and, fourth, there was a negative relationship between corporate leverage and the probability of bankruptcy (or expected bankruptcy costs), implying capital structure decisions are affected by the prospect of bankruptcy costs.

Keywords: CAPITAL STRUCTURE; DIRECT BANKRUPTCY COSTS; INDIRECT BANKRUPTCY COSTS; PROBABILITY OF BANKRUPTCY (search for similar items in EconPapers)
Date: 1989
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Persistent link: https://EconPapers.repec.org/RePEc:sae:ausman:v:14:y:1989:i:1:p:75-95

DOI: 10.1177/031289628901400105

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