Journal of Banking & Finance Vol. 29 No. 6 2005
Cash-flow shortage as an endogenous bankruptcy reason
Abstract
This paper develops a simple model for a leveraged firm and endogenizes the firm’s bankruptcy point by assuming that equity issuance is costly. Equity-issuance costs reflect the difficulties in issuing new equity for firms that are close to financial distress. The resulting model captures cash-flow shortage as a reason to go bankrupt, though the equity value is positive. I analyze the optimal bankruptcy point as well as corporate bond prices and yield spreads for various levels of equity-issuance costs in order to study the impact of different liquidity constraints. Finally, I discuss the consequences on optimal capital structure.
- DOI
- 10.1016/j.jbankfin.2004.06.026
- Volume
- 29
- Issue
- 6
- Pages
- 1509-1534
- Language
- en
- Sources
- openalex crossref bibtex:phds-export.bib