Balance-sheet data offer a potentially large number of candidate predictors of corporate financial failure. In this paper we provide a novel predictor selection procedure based on non-parametric regression and classification tree method (CART) and test its performance within a standard logit model. We show that a simple logit model with dummy variables created in accordance with the nodes of es...

We incorporate long-term defaultable corporate bonds and credit risk in a dynamic stochastic general equilibrium business cycle model. Credit risk amplifies aggregate technology shocks. The debt-capital ratio is a new state variable and its endogenous movements provide a propagation mechanism. The model can match the persistence and volatility of output growth as well as the mean equity premium...

Article history: Received 22 December 2008 Received in revised 4 February 2009 Accepted 6 February 2009 Available online 20 February 2009 This article integrates an earnings-based capital structure model into a simple real options framework to analyze the effects of managerial optimism and overconfidence on the interaction between financing and investment decisions. Several empirical implicatio...

Brander and Lewis argue in a seminal paper (AER, 1986) that a Þrm’s debt-equity ratio should have important strategic effects on product market competition. We test their model in a duopoly experiment under both, Bertrand and Cournot competition. We Þnd that leverage has strategic effects, but those effects are much weaker than predicted by theory. SpeciÞcally, we Þnd for price competition a ge...

The Russian banking sector experienced considerable turmoil in the late 1990s, especially around the Russian banking crisis in 1998. The question is what types of banks are vulnerable to shocks and whether or not bank-specific characteristics can be used to predict vulnerability to failures. In this study we employ a parametric logit model and a nonparametric trait recognition approach to predi...

This paper analyzes auctions where budget-constrained bidders have options to declare bankruptcy. It predicts a bidding equilibrium that changes discontinuously in a borrowing rate available to bidders. When the borrowing rate is above a threshold, high-budget bidders win, and the likelihood of bankruptcy is low. When the borrowing rate is below the threshold, the winner is the most budget-cons...

This paper analyzes the capital structure of a firm in an infinite time horizon following [30] under the more general hypothesis that the firm’s assets value process belongs to a fairly large class of stochastic volatility models. By applying singular perturbation theory, we fully describe the (approximate) capital structure of the firm in closed form as a corrected version of [30] and analyze ...

Moody’s databases of corporate issuers of long term bonds and structured products are used to estimate asset correlations across a group of sectors, world regions and products. The estimation of a dynamic factor model for default risk is performed using Bayesian methods. Results indicate that a two factor model rather than the one factor model, as proposed by the Basel II framework, better repr...

Using a large sample of accounting data for non …nancial companies in France on the period 1990-2004, the paper studies the interactions between macroeconomic shocks and companies’…nancial fragility. We consider links in both directions, namely whether …rms’bankruptcies are a¤ected by macroeconomic variables, and whether bankruptcies determine the business cycle. We estimate forecasting equatio...

The 1991 Credit Lyonnais court ruling expanded the fiduciary duties of managers towards debtholders in near-insolvent Delaware firms. Differences-in-differences tests reveal that innovation efficiency increased among all Delaware firms following the ruling. Further, Delaware firms close to (far from) insolvency reduced (expanded) their R&D expenditures and innovation output. Both sets of firms ...