This study estimates some direct and indirect costs of bankruptcy in the Australian context from September 1978 to May 1983.
The findings are: first, there was some degree of capital market inefficiency in the processing of infor Mation relevant to the bankrupt firms; second, bankruptcy costs, in particular indirect costs, were sizeable, approximately over 20% of firm's value; third, the expected present value of bankruptcy costs greatly exceeded the tax benefits from leverage for thirteen of the fourteen firms under study; and, fourth, there was a negative relationship between corporate leverage and the probability of bankruptcy (or expected bankruptcy costs), implying capital structure decisions are affected by the prospect of bankruptcy costs.
Aharony, J., C.P. Jones, and I. Swary, 1980, An analysis of risk and return characteristics of corporate bankruptcy using capital market data, Journal of Finance, 35, 4, 1,001–1,016.
2.
Altman, E., 1984, A further empirical investigation of the bankruptcy cost question, Journal of Finance, 39, 4, 1,067–1,088.
3.
Barnea, A., R. Hangen, and L. Senbet, 1981, Market imperfections, agency problems, and capital structure: a review, Financial Management, 10, 3, 7–22.
4.
Baron, D.P., 1976, Default risk and the MM theorem: a syntheses, American Economic Review, 66, 1, 204–212.
5.
Baxter, N., 1967, Leverage risk of ruin and the cost of capital, Journal of Finance, 22, 4, 395–403.
6.
Bradley, M., G. A. Jarrell, and E.H. Kim, 1984, On the existence of an optimal capital structure: theory and evidence, Journal of Finance, 39, 3, 857–863.
7.
Brealey, R. and S. Myers, 1984, Principles of Corporate Finance, 2nd ed., (New York, McGraw).
8.
Brennan, M.J. and E.S. Schwartz, 1978, Corporate income taxes, valuation and the problem of optimal capital structures, Journal of Business, 51, 1, 103–114.
9.
Castagna, A. and Z. Matolcsy, 1980, The market characteristics of failed companies: extensions and further evidence, Unpublished Paper, Kuringai College of Advanced Education.
10.
Castanias, R., 1983, Bankruptcy risk and optimal capital structure, Journal of Finance, 38, 5, 1,617–1,629.
11.
Chen, A., 1978, Recent developments in the cost of debt capital, Journal of Finance, 33, 3, 863–877.
12.
Chen, A.H. and E.H. Kim, 1979, Theories of corporate debt policy: a synthesis, Journal of Finance, 34, 2, 371–384.
13.
Clark, T.A. and M.I. Weinstein, 1983, The behaviour of the common stock of bankrupt firms, Journal of Finance, 38, 2, 489–504.
14.
Copeland, T.E. and J.F. Weston, 1983, Financial Theory and Corporate Policy, (Reading, MA, Addison-Wesley).
15.
DeAngelo, H. and R.W. Masulis, 1980, Optimal capital structure under corporate and personal taxation, Journal of Financial Economics, 8, 1, 3–29.
16.
Fama, E.F., 1980, Agency problems and the theory of the firm, Journal of Political Economy, 88, 2, 288–307.
17.
Ford, H. A.J., 1981, Principles of Company Law, (Sydney, Butterworths) 3rd edition.
18.
Flath, D. and C.R. Knoeber, 1980, Taxes, failure costs and optimal industry capital structure: an empirical test, Journal of Finance, 35, 1, 99–117.
19.
Hagen, K.P., 1976, Default risk, home made leverage and the MM theorem: a note, American Economic Review, 66, 1, 199–203.
20.
Haugen, R. A., and L.W. Senbet, 1978, The insignificance of bankruptcy costs to the theory of optimal capital structure, Journal of Finance, 33, 2, 383–393.
21.
Jensen, M.C. and W.H. Meckling, 1976, Theory of the firm managerial behaviour, agency costs and ownership structure, Journal of Financial Economics, 3, 4, 305–360.
22.
Kalaba, R.E., T.C. Langetieg, N. Rasakhoo, and M.I. Weinstein, 1984, Estimation of implied bankruptcy costs, Journal of Finance, 39, 3, 629–642.
23.
Kim, E. H., 1978, A mean-variance theory of optimal capital structure and corporate debt capacity, Journal of Finance, 33, 1, 45–63.
24.
Kim, E.H., 1982, Miller's equilibrium, shareholder leverage clienteles and optimal capital structure, Journal of Finance, 37, 2, 301–319.
25.
Kim, E.H., W.G. Lewellan, and J.J. McConnell, 1979, Financial leverage clienteles: theory and evidence, Journal of Financial Economics, 7, 1, 83–109.
26.
Kraus, A. and R. Litzenberger, 1973, A state preference model of optimal financial leverage, Journal of Finance, 28, 4, 911–922.
27.
Lee, W. and H. Barker, 1977, Bankruptcy costs and the firm's optimal debt capacity: a positive theory of capital structure, Southern Economic Journal, 43, 4, 1,453–1,465.
28.
Letton, P., 1981, Magnitude of bankruptcy costs, B.Com. (Hons) Thesis, University of New South Wales, Kensington.
29.
Lincoln, M., 1982, The usefulness of accounting ratios to describe levels of insolvency risk, Unpublished Ph. D. Dissertation, November, Melbourne University, Melbourne.
30.
Miller, M., 1977, Debt and taxes, presidential address, Journal of Finance, 32, 2, 261–276.
31.
Modigliani, F. and M.H. Miller, 1958, The cost of capital, corporation finance and the theory of investment, American Economic Review, 48, 3, 261–297.
32.
Modigliani, F. and M. Miller, 1963, Corporate income taxes and the cost of capital: a correction, American Economic Review, 53, 3, 433–443.
33.
Myers, S., 1977, Determinants of corporate borrowing, Journal of Financial Economics, 5, 2, 147–175.
34.
Myers, S., 1984, The capital structure puzzle, Journal of Finance, 39, 3, 575–584.
35.
Robertson, D.K. and R.B. Tress, 1985, Bankruptcy costs: evidence from small-firm liquidations, Australian Journal of Management, 10, 1, 49–60.
36.
Robichek, A. and S. Myers, 1966, Problems in the theory of optimal capital structure, Journal of Financial and Quantitative Analysis, 1, 1, 1–35.
37.
Scott, J.H., Jr., 1976, A theory of optimal capital structure, The Bell Journal of Economics, 7, 1, 33–54.
38.
Scott, J.H., Jr., 1977, Bankruptcy, secured debt, and optimal capital structure, Journal of Finance, 32, 1, 1–20.
39.
Stiglitz, J.E., 1969, A reëxamination of the Modigliani-Miller theorem, American Economic Review, 59, 5, 784–793.
40.
Stiglitz, J.E., 1974, On the irrelevance of corporate financial policy, American Economic Review, 64, 6, 851–866.
41.
Taggart, R. A., Jr., 1980, Taxes and corporate capital structure in an incomplete market, Journal of Finance, 35, 3, 645–659.
42.
Titman, S., 1984, The effect of capital structure on a firm's liquidation decision, Journal of Financial Economics, 13, 1, 137–151.
