How Large are Predefault Costs of Financial Distress? Estimates from a Dynamic Model

• 成果类型: Article
• 署名作者: Elkamhi, Redouane; Kim, Daniel; Salerno, Marco
• 署名单位: University of Toronto; University of Waterloo
• 刊物名称: MANAGEMENT SCIENCE
• ISSN/ISSBN: 0025-1909
• DOI: 10.1287/mnsc.2023.4974
• 发表日期: 2024
• 关键词: dynamic capital structure; Financial distress; structural estimation

摘要

We estimate the costs of financial distress prior to default (predefault costs) separately from the loss incurred at default (the loss given default) using a dynamic tradeoff model of capital structure. We show that predefault costs account for a large fraction of total distress costs, approximately 64.1%. At the same time, they vary across industries ranging from 32.1% to 75%. We demonstrate that the expected predefault costs of financial distress vary significantly across industries with a range between 3.2% and 8.3% and are higher for small firms relative to larger ones.