Cost of Financial Distress in the Cash Flow Model of Capital Structure

Náklady finanční tísně v cash flow modelech kapitálové struktury

Tomas Buus

Český finanční a účetní časopis, 2014, vol. 2014, issue 3, 46-58

Abstract: Since the Miller and Modigliani (1958, 1963) theory of capital structure the literature struggles to include cost of financial distress in the cash flow theories of capital structure. Besides that most of the recent models are static. Let us just remind the contributions by Cooper, and Nyborg (2006), Farber, Gillet, and Szafarz (2006), Qi, Liu and Johnson (2012) or Fernández's (2004, 2007) analysis of their predecessors' work. This paper brings dynamic, and risk consistent (in the meaning of return being purely growing function of risk), although regarding the quantification of financial distress cost somewhat simplified model. His advantage is simplicity and observability of all its exogenous (input) variables. However, the clarification of relationship between face and market value of debt, and empirical test of model are needed.

Keywords: Capital structure; Cost of financial distress; Tax shield; Equity; Debt; Kapitálová struktura; Náklady finanční tísně; Daňový štít; Vlastní kapitál; Cizí kapitál (search for similar items in EconPapers)
JEL-codes: C67 D51 F41 H21 H22 H30 (search for similar items in EconPapers)
Date: 2014
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DOI: 10.18267/j.cfuc.408

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