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