Earnings Retention as a Specification Mechanism in Predicting Corporate Bankruptcy

Rahul Dhumale

Chapter 5 in Excess Cash Flow, 2003, pp 114-150 from Palgrave Macmillan

Abstract: Abstract Chapter 4 estimated a model for finance strategy based on firm quality using Indian data. Chapter 5 extends this analysis by assessing the influence of a firm’s capital structure on the probability of bankruptcy. The aim is to find if retained earnings are more significant relative to bankruptcy in firms with fewer investment opportunities (i.e., low q vs. high q firms). Bankruptcy theory provides a framework combining corporate financial structure, relationship between debt and equity, the composition and ownership of corporate debt, and the structure of share ownership. Leverage becomes an important consideration as it can shift the balance of bargaining power during bankruptcy. This exacerbates asymmetric information between debtors, creditors, and equity holders encouraging low-quality firms to continue overinvesting.

Keywords: Total Asset; Capital Structure; Loan Portfolio; Equity Holder; Imperfect Capital Market (search for similar items in EconPapers)
Date: 2003
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Persistent link: https://EconPapers.repec.org/RePEc:pal:palchp:978-0-230-50951-1_5

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DOI: 10.1057/9780230509511_5

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