Companies incur significant costs from the financial distress. Predicting financial distress will have an important role in preventing bankruptcy. The aim of the present study is to predict the financial distress costs using the Leland and Toft models, during 1996 and 1998. This study examines data relating to 49 companies listed in the Tehran stock exchange collected over ten years from 2005 t...

What is the effect of capital structure policy on credit spreads? In a widely cited paper by Huang and Huang (2003), a few representative structural models of credit spreads have been calibrated and compared. Among them are the model by Collin-Dufresne and Goldstein (2001) and the one by Leland and Toft (1996). The former assumes exogenously given stationary mean-reverting leverage, the latter ...

A common wisdom about term structure models is that they predict much lower spreads than the observed spreads for investment-grade bond, and most of them tend to overpredict spreads for junk bonds. Among them, the Leland-Toft model is perhaps most controversial. Some studies show it always overpredict spreads, in some cases they can be as high as over 5000 bps, yet other studies show it generat...

We focus on structural models in corporate finance with roll-over debt structures in the vein of Leland (1994) and Leland and Toft (1996). We show that these models incorrectly assume that the optimal default is defined by the first time such that the firm’s assets reaches a sufficiently low positive threshold that must be optimally determined. We characterize the optimal default policy and exp...

We propose a two-sided jump model for credit risk by extending the Leland-Toft endogenous default model based on the geometric Brownian motion. The model shows that jump risk and endogenous default can have significant impacts on credit spreads, optimal capital structure, and implied volatility of equity options: (1) The jump and endogenous default can produce a variety of non-zero credit sprea...

This paper focuses on the defaultable lease rate term structure with endogenous default. We combine the competitive lease market argument proposed by Grenadier (1996) and the endogenous default structural model proposed by Leland and Toft (1996) to examine the interaction between the lessee’s capital structure and the equilibrium lease rate. Under this framework, determining the lease rate is a...

Using a large sample of Chapter 11 filings from 1996 to 2007 we find that the endogenously determined expected recovery derived from Leland and Toft (1996) has strong explanatory power on debt recovery observed in the market. Our results hold after firm characteristics, industry distress, and macroeconomic conditions are accounted for. In addition, we find that agency conflicts and ex post bank...

We revisit the previous work of Leland [13], Leland and Toft [12] and Hilberink and Rogers [8] on optimal capital structure and show that the issue of an optimal endogenous default level can be dealt with analytically and numerically when the underlying source of randomness is replaced by that of a general spectrally negative Lévy process. By working with the latter class of processes we bring ...