Are Corporate Default Probabilities Consistent with the Static Tradeoff Theory?

Armen Hovakimian, Ayla Kayhan () and Sheridan Titman

No 17290, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Default probability plays a central role in the static tradeoff theory of capital structure. We directly test this theory by regressing the probability of default on proxies for costs and benefits of debt. Contrary to predictions of the theory, firms with higher bankruptcy costs, i.e., smaller firms and firms with lower asset tangibility, choose capital structures with higher bankruptcy risk. Further analysis suggests that the capital structures of smaller firms with lower asset tangibility, which tend to have less access to capital markets, are more sensitive to negative profitability and equity value shocks, making them more susceptible to bankruptcy risk.

JEL-codes: G3 G33 (search for similar items in EconPapers)
Date: 2011-08
New Economics Papers: this item is included in nep-ban, nep-bec and nep-rmg
Note: CF
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Citations: View citations in EconPapers (3)

Published as Armen Hovakimian & Ayla Kayhan & Sheridan Titman, 2012. "Are Corporate Default Probabilities Consistent with the Static Trade-off Theory?," Review of Financial Studies, Society for Financial Studies, vol. 25(2), pages 315-340.

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Journal Article: Are Corporate Default Probabilities Consistent with the Static Trade-off Theory? (2012)
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