Investment opportunities and bankruptcy prediction

Evgeny Lyandres, Alexei Zhdanov

Research output: Contribution to journalArticleResearchpeer-review

24 Citations (Scopus)

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 languageEnglish
Pages (from-to)439-476
Number of pages38
JournalJournal of Financial Markets
Volume16
Issue number3
DOIs
Publication statusPublished - Aug 2013
Externally publishedYes

Keywords

  • Bankruptcy
  • Investment opportunities

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