Advanced

Non-linearity in the impact of bankruptcy risk on leverage

Alfranseder, Emanuel LU and Asgharian, Hossein LU (2015) In Essays on Financial Risks and the Subprime Crisis p.119-137
Abstract
The paper investigates the effect of bankruptcy risk on firms’ financing decisions. More specifically, we analyze if a higher probability of bankruptcy reduces incentives for debt financing due to an increase in expected bankruptcy cost. We argue that an increase in bankruptcy risk affects financial decisions only when the probability of bankruptcy is sufficiently high. We therefore model a nonlinear relationship between changes in leverage and bankruptcy risk. Our findings show that an increase in bankruptcy risk has a negative impact on changes in leverage and the impact is clearly nonlinear.
Please use this url to cite or link to this publication:
author
organization
publishing date
type
Chapter in Book/Report/Conference proceeding
publication status
published
subject
in
Essays on Financial Risks and the Subprime Crisis
editor
Alfranseder, Emanuel and
issue
188
pages
19 pages
publisher
Lund University
ISSN
0460-0029
ISBN
978-91-7623-303-0
language
English
LU publication?
yes
id
5efbefd2-7660-490f-b21d-3f167e0b113d
date added to LUP
2016-12-06 16:23:33
date last changed
2016-12-21 11:20:03
@inbook{5efbefd2-7660-490f-b21d-3f167e0b113d,
  abstract     = {The paper investigates the effect of bankruptcy risk on firms’ financing decisions. More specifically, we analyze if a higher probability of bankruptcy reduces incentives for debt financing due to an increase in expected bankruptcy cost. We argue that an increase in bankruptcy risk affects financial decisions only when the probability of bankruptcy is sufficiently high. We therefore model a nonlinear relationship between changes in leverage and bankruptcy risk. Our findings show that an increase in bankruptcy risk has a negative impact on changes in leverage and the impact is clearly nonlinear.},
  author       = {Alfranseder, Emanuel and Asgharian, Hossein},
  editor       = {Alfranseder, Emanuel},
  isbn         = {978-91-7623-303-0},
  issn         = {0460-0029},
  language     = {eng},
  number       = {188},
  pages        = {119--137},
  publisher    = {Lund University},
  series       = {Essays on Financial Risks and the Subprime Crisis},
  title        = {Non-linearity in the impact of bankruptcy risk on leverage},
  year         = {2015},
}