A Market-Based Study of the Cost of Default

Sergei A. Davydenko; Ilya A. Strebulaev; Xiaofei Zhao

doi:10.1093/rfs/hhs091

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A Market-Based Study of the Cost of Default

Sergei A. Davydenko¹; Ilya A. Strebulaev²; Xiaofei Zhao¹

¹ University of Toronto · ² Stanford University

Review of Financial Studies 2012

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. (JEL G21, G30, G33)

DOI: 10.1093/rfs/hhs091
Volume: 25 (10)
Pages: 2959-2999
Language: en
Export: BibTeX
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