Investment opportunities and bankruptcy prediction

Evgeny Lyandres and Alexei Zhdanov

Journal of Financial Markets, 2013, vol. 16, issue 3, 439-476

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 the likelihood of bankruptcy. Augmenting existing bankruptcy prediction models by these measures improves their out-of-sample forecasting ability.

Keywords: Investment opportunities; Bankruptcy (search for similar items in EconPapers)
JEL-codes: G33 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (17)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finmar:v:16:y:2013:i:3:p:439-476

DOI: 10.1016/j.finmar.2012.10.003

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