Cash-Flow Shortage as an Endogenous Bankruptcy Reason

Posted: 1 Apr 2005

See all articles by Marliese Uhrig-Homburg

Marliese Uhrig-Homburg

Karlsruhe Institute of Technology (KIT) - Institute for Finance

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.

Keywords: Continuous-time bankruptcy model, corporate bond pricing, credit spreads, equity finance costs, optimal capital structure

JEL Classification: G13, G32, G33

Suggested Citation

Uhrig-Homburg, Marliese, Cash-Flow Shortage as an Endogenous Bankruptcy Reason. Available at SSRN: https://ssrn.com/abstract=681061

Marliese Uhrig-Homburg (Contact Author)

Karlsruhe Institute of Technology (KIT) - Institute for Finance ( email )

P.O. Box 6980
D-76049 Karlsruhe, DE
Germany
+49 721 6084 8183 (Phone)
+49 721 6084 8190 (Fax)

HOME PAGE: http://derivate.fbv.kit.edu/english/index.php

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