Explaining Debt Recovery Using an Endogenous Bankruptcy Model

Drawing on a large sample of defaulted corporate debt from 1996 to 2007, we find that the debt recovery estimated using the Leland-Toft endogenous bankruptcy model has strong explanatory power on the debt recovery observed in the market. Our results hold after firm characteristics, industry distress, and macroeconomic conditions are taken into account. In addition, we find that both agency problems and heterogeneous bankruptcy costs weaken the explanatory power of the model. Our study suggests structural models that incorporate the role of managers in endogenously determining the bankruptcy boundary provide statistical power in explaining cross-sectional variation of corporate debt recovery.

Keywords: Bankruptcy, Debt Recovery, Structural Model, Bankruptcy Cost, Agency Conflict

JEL Classification: G33, G30

Suggested Citation: Suggested Citation

Suo, Wulin and Wang, Wei and Zhang, Amber Qi, Explaining Debt Recovery Using an Endogenous Bankruptcy Model (May 1, 2013). Midwest Finance Association 2013 Annual Meeting Paper, Available at SSRN: https://ssrn.com/abstract=2154725 or http://dx.doi.org/10.2139/ssrn.2154725