Abstract
A firm's mix of growth options and assets in place is an important determinant of its optimal default strategy. Our simple model shows that shareholders of a firm with valuable investment opportunities would be able/willing to wait longer before defaulting on their contractual debt obligations than shareholders of an otherwise identical firm without such opportunities. More importantly, we show empirically using a dataset of recent corporate bankruptcies that measures of investment opportunities are significantly related to the likelihood of bankruptcy. Augmenting existing bankruptcy prediction models by these measures improves their out-of-sample forecasting ability.
Original language | English |
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Pages (from-to) | 439-476 |
Number of pages | 38 |
Journal | Journal of Financial Markets |
Volume | 16 |
Issue number | 3 |
DOIs | |
State | Published - Aug 2013 |
Externally published | Yes |
Keywords
- Bankruptcy
- Investment opportunities
All Science Journal Classification (ASJC) codes
- Finance
- Economics and Econometrics