We estimate the costs of financial distress prior to default (pre-default costs) separately from the loss incurred at default (the loss given default) using a dynamic trade-off model of capital structure. We document that pre-default costs are on average equal to 6.5% of firm value per year. We...

Rather than assuming a fixed recovery rate in estimation, we estimate recovery rates from CDS spreads, using three years of daily data on 152 corporates. We use a quadratic pricing model which ensures nonnegative default probabilities and recovery rates. The estimated cross-section of recovery...

We develop a structural equilibrium model with business cycles and use it to examine the economic implications of voluntary filing for bankruptcy. We find that conflict of interests that arises from the voluntary filing option of Chapter 11 causes higher ex-ante losses in firm value in...

We develop a methodology to study the linkages between equity and corporate bond risk premia and apply it to a large panel of corporate bond transaction data. We and that a significant part of the time variation in bond default risk premia can be explained by equity implied bond risk premium...

At any point in time, most firms are not in financial distress. This implies that they must suffer value losses unrelated to their leverage before becoming financially distressed. We first show that if estimates of ex-ante distress costs are not filtered of such non-debt related value declines,...