Review of Financial Studies Vol. 25 No. 10 2012
A Market-Based Study of the Cost of Default
Abstract
[This article proposes a novel method of extracting the cost of default from the change in the market value of a firm's assets upon default. Using a large sample of firms with observed prices of debt and equity that defaulted over fourteen years, we estimate the cost of default for an average defaulting firm to be 21.7% of the market value of assets. The costs vary from 14.7% for bond renegotiations to 30.5% for bankruptcies, and are substantially higher for investment-grade firms (28.8%) than for highly levered bond issuers (20.2%), which extant estimates are based on exclusively.]
- Volume
- 25
- Issue
- 10
- Pages
- 2959-2999
- Sources
- bibtex:phds-export.bib