A structural model with Explicit Distress

Ricardo Correia and Javier Población

Journal of Banking & Finance, 2015, vol. 58, issue C, 112-130

Abstract: We construct a model for valuing firms and corporate securities incorporating economic and financial distress. The inclusion of financial distress costs is able to explain the low debt/zero debt puzzle and to clarify the relation between earnings and financial leverage. With standard parameter values, this model generates more realistic estimates of leverage ratios, credit spreads and recovery rates relative to a standard model of direct costs of bankruptcy. It clarifies the relation between optimal leverage and debt capacity and addresses different structural model problems such as underestimating (overestimating) spreads on safe (risky) bonds and relying on unrealistic high estimates for direct costs of bankruptcy.

Keywords: Structural models; Financial distress; Optimal capital structure (search for similar items in EconPapers)
JEL-codes: G12 G13 G32 G33 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0378426615000886
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:58:y:2015:i:c:p:112-130

DOI: 10.1016/j.jbankfin.2015.03.011

Access Statistics for this article

Journal of Banking & Finance is currently edited by Ike Mathur

More articles in Journal of Banking & Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().