Are Corporate Default Probabilities Consistent with the Static Tradeoff Theory? / Armen Hovakimian, Ayla Kayhan, Sheridan Titman.

Format:

Book

Author/Creator:

Hovakimian, Armen.

Contributor:

National Bureau of Economic Research.

Kayhan, Ayla.

Titman, Sheridan.

Series:

Working Paper Series (National Bureau of Economic Research) no. w17290.

NBER working paper series no. w17290

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2011.

Summary:

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.

Notes:

Print version record

August 2011.