scholarly journals Bankruptcy Costs and the Design of Preventive Restructuring Procedures

2021 ◽  
Author(s):  
Banque de France RPS Submitter ◽  
Anne Epaulard ◽  
Chloé Zapha
Keyword(s):  
Bankruptcy Costs

A Single Period Stochastic Model for Maximising Firms Value

GIS Business ◽  
2016 ◽  
Vol 11 (6) ◽  
pp. 39-45
Author(s):  
J. P. Singh
Keyword(s):  
Capital Market ◽  
Firm Value ◽  
Capital Asset Pricing ◽  
Capital Asset ◽  
Asset Pricing Model ◽  
Value Maximization ◽  
Risk Return ◽  
Bankruptcy Costs ◽  
Single Period ◽  
Debt Capacity

This article sets up a single period value maximization model for the firm based on stochastic end-of-period cash inflows, stochastic bankruptcy costs and taxes based on income rather than wealth. The risk-return trade-off is captured in the Capital Asset Pricing Model. Thus, the model also assumes a perfect capital market and market equilibrium. The model establishes the existence of a unique optimal financial leverage at which the firm value is maximized, this leverage being less than the maximum debt capacity of the firm.

Bankruptcy Costs and the Firm's Optimal Debt Capacity: A Positive Theory of Capital Structure

1977 ◽  
Vol 43 (4) ◽  
pp. 1453 ◽  
Author(s):  
Wayne Y. Lee ◽  
Henry H. Barker
Keyword(s):  
Capital Structure ◽  
Positive Theory ◽  
Bankruptcy Costs ◽  
Debt Capacity

Do Country-level Creditor Protections Affect Firm-level Debt Structure Concentration?

2021 ◽  
Author(s):  
Kose John ◽  
Mahsa S Kaviani ◽  
Lawrence Kryzanowski ◽  
Hosein Maleki
Keyword(s):  
Debt Structure ◽  
Difference In Differences ◽  
Firm Level ◽  
Creditor Rights ◽  
Country Level ◽  
Bankruptcy Costs ◽  
Cash Flow Volatility ◽  
Cross Country ◽  
Using Data ◽  
Alternative Settings

Abstract We study the effects of country-level creditor protections on the firm-level choice of debt structure concentration. Using data from 46 countries, we show that firms form more concentrated debt structures in countries with stronger creditor protection. We propose a trade-off framework of optimal debt structure and show that in strong creditor rights regimes, the benefit of forming concentrated structures outweighs its cost. Because strong creditor protections increase liquidation bias, firms choose concentrated debt structures to improve the probability of successful distressed debt renegotiations. Firms with ex-ante higher bankruptcy costs, including those with higher intangibility, cash flow volatility, R&D expenses, and leverage exhibit stronger effects. Firms with restricted access to capital are also affected more. A difference-in-differences analysis of firms’ debt structure responses to creditor rights reforms confirms the cross-country results. Our findings are robust to alternative settings and a battery of robustness checks.

On the Social Costs of Bankruptcy

2014 ◽  
Vol 5 (1) ◽  
pp. 58-91 ◽  
Author(s):  
Donald D. Hackney ◽  
Matthew Q. McPherson ◽  
Daniel Friesner ◽  
Candice Correia
Keyword(s):  
Random Sample ◽  
Social Costs ◽  
Substantial Portion ◽  
Administrative Costs ◽  
Bankruptcy Costs ◽  
The Social ◽  
Debt Repayment ◽  
Eastern Washington

The goal of BAPCPA is to shift bankruptcy filers from Chapter 7 to Chapter 13. The basis for this goal is the assumption that Chapter 7 filers repay much less of their debt than do Chapter 13 filers. Therefore, shifting debtors from Chapter 7 to Chapter 13 will increase debt repayment and lessen the amount of bankruptcy costs shifted to society as a whole. In order for this reasoning to be valid, it is necessary to substantiate the claim that Chapter 13 actually leads to substantial debt repayment. This paper examines the validity of this assumption using a random sample of filers from the Eastern Washington U.S. Federal Bankruptcy Court District in 2003 and 2005. The authors find that filers do, indeed, repay a substantial portion of their debts. This suggests that Chapter 13 is effective in generating debt repayment. However, Chapter 13 repayments also create major administrative costs, and frequently provide little benefit to general unsecured creditors. Moreover, the effectiveness of Chapter 13 bankruptcies is substantially reduced (by nearly a 2.5 to 1 ratio) if debtors do not successfully complete the repayment plans. As such, BAPCPA appears to miss an opportunity to further reduce the social costs of bankruptcy.

Valuing firm’s financial flexibility under default risk and bankruptcy costs: a WACC based approach

2019 ◽  
Vol 15 (5) ◽  
pp. 688-699
Author(s):  
Carlo Mari ◽  
Marcella Marra
Keyword(s):  
Capital Structure ◽  
Default Risk ◽  
Weighted Average ◽  
Debt Management ◽  
Costs And Benefits ◽  
Debt Structure ◽  
Financial Flexibility ◽  
Content Type ◽  
Bankruptcy Costs ◽  
Debt Capacity

PurposeThe purpose of this paper is to present a model to value leveraged firms in the presence of default risk and bankruptcy costs under a flexible firm’s debt structure.Design/methodology/approachThe authors assume that the total debt of the firm is a combination of two debt components. The first component is an active debt component which is assumed to be proportional to the firm’s value. The second one is a passive predetermined risk-free debt component. The combination of the two debt categories makes the firm’s capital structure more realistic and allows us to include flexibility into the firm’s debt structure management. The firm’s valuation is performed using the discounted cash flow technique based on the weighted average cost of capital (WACC) method.FindingsThe model can be used to define active debt management strategies that can induce the firm to deviate from its capital structure target in order to preserve debt capacity for future funding needs. The firm’s valuation is performed by using the WACC method and a closed form valuation formula is provided. Such a formula can be used to value costs and benefits of financial flexibility.Research limitations/implicationsThe proposed approach provides a good compromise between mathematical complexity and model capability of interpreting the various economic and financial aspects involved in the firm’s debt structure puzzle.Practical implicationsThis model offers a realistic approach to practical applications where real financing decisions are characterized by a simultaneous use of these two debt categories. By comparing costs and benefits deriving from using unused debt capacity for future funding needs, the model provides a quantitative support to investigate if financial flexibility can add value to firms.Originality/valueTo the authors knowledge, the approach the authors propose is the first attempt to build a valuation scheme that accounts for firm’s financial flexibility under default risky debt and bankruptcy costs. Including financial flexibility, this model fills an important gap in the literature on this topic.

Bankruptcy Costs

2008 ◽  
pp. 29-30
Keyword(s):  
Bankruptcy Costs

scholarly journals Analysis of Bankruptcy Threat for Risk Management Purposes: A Model Approach

2018 ◽  
Vol 6 (4) ◽  
pp. 98
Author(s):  
Monika Wieczorek-Kosmala ◽  
Joanna Błach ◽  
Joanna Trzęsiok
Keyword(s):  
Risk Management ◽  
Liquidity Constraints ◽  
Capacity Constraints ◽  
Two Dimensions ◽  
Risk Map ◽  
Bankruptcy Costs ◽  
Debt Capacity ◽  
The Impact ◽  
Effective Design ◽  
Model Approach

In previous works, the importance of risk management implementation was addressed with regard to the problem of bankruptcy threat, with the explanation of risk impact on higher bankruptcy costs or the underinvestment problem. However, the evaluation of the impact of risk outcomes is technically linked to risk frequency and risk severity as the two dimensions of the risk map. The purpose of our study is to advocate two additional dimensions that incorporate liquidity and/or debt capacity constraint in the aftermath of risk occurrence. In the conceptual dimension, we propose a model that may support the appropriate design of risk management methods, by scaling a company’s ability to self-resist the risk outcomes. The study provides the empirical illustration of the frequency of the distinguished patterns of risk self-resistance. It was found that most frequently companies face the limited ability to self-resist risk outcomes, due to high debt capacity and high liquidity constraints. We also found statistically significant interdependencies between the company’s sector and the risk self-resistance. It supports the conclusion that the level of liquidity and debt capacity constraints and thus the ability to retain risk outcomes is sector-specific. It has important implications for the effective design of risk management methods.

Corporate real estate, capital structure and value creation

2017 ◽  
Vol 10 (3) ◽  
pp. 384-404 ◽  
Author(s):  
Maria-Teresa Bosch-Badia ◽  
Joan Montllor-Serrats ◽  
Anna-Maria Panosa-Gubau ◽  
Maria-Antonia Tarrazon-Rodon
Keyword(s):  
Real Estate ◽  
Capital Structure ◽  
Structure Theory ◽  
Trade Off ◽  
Content Type ◽  
Default Option ◽  
Bankruptcy Costs ◽  
Corporate Real Estate ◽  
Tax Savings ◽  
The Impact

Purpose This paper aims to analyse the corporate rent-vs-buy decision on real estate through the trade-off theory and default option in the framework of a corporation that aims to optimise its capital structure. Design/methodology/approach The methodological core of this paper comprises the trade-off theory that approaches the optimal capital structure by counterbalancing debt tax savings with bankruptcy costs. Impacts on the default option and the default barrier are made explicit. The paper also explores the practical applicability of the renting scenarios in the European context by examining the regimes of real estate investment trusts in different countries from the demand-side of commercial renting. Findings Analytical relationships with tax savings, bankruptcy costs, default option and default barrier are identified for the renting-vs-buying real estate decisions. Research limitations/implications The theoretical model assumes simplifications, such as constant debt, to make it operational. The paper centres exclusively on the trade-off capital structure theory. Practical implications This paper is an analysis of corporate real estate decisions together with capital structure. Applications are not only quantitative but also conceptual and strategic. Originality/value Identifying the main variables that govern the impact of corporate real estate decisions on capital structure and interweaving different approaches generates a conceptual framework that enlightens strategic thinking in this field.

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