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The Administrative Costs of Corporate Bankruptcy: A Note

The Administrative Costs of Corporate Bankruptcy: A Note The Administrative Costs of Corporate Bankruptcy: A Note JAMES S. ANG, JESS H. CHUA, and JOHN J. MCCONNELL* IN THISPAPER W E present evidence on the direct administrative costs of corporate bankruptcy. The investigation is directed toward providing evidence that may be helpful in answering questions about the role of bankruptcy costs as a determinant of corporate capital structures. The importance of bankruptcy costs as a determinant of corporate financing policy has been extensively debated in the finance literature. The origins of the debate can be traced to Modigliani and Miller [8] and Robichek and Myers [9]. Under the assumption that debt is default-free and interest payments are taxdeductible, Modigliani and Miller demonstrated that firms will maximize their market values by maximizing their use of debt financing. Robichek and Myers demonstrated that this conclusion also holds when debt is not default-free, but bankruptcy is costless. To explain observed corporate debt to total value ratios, which typically fall in the range of 20 percent to 30 percent, Robichek and Myers [9] and Baxter [l] appealed to the existence of bankruptcy costs as a possible counterweight to the tax-deductibility of interest payments. Subsequently, Kraus and Litzenberger [5], Scott [lo], Lee http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Finance Wiley

The Administrative Costs of Corporate Bankruptcy: A Note

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References (15)

Publisher
Wiley
Copyright
1982 The American Finance Association
ISSN
0022-1082
eISSN
1540-6261
DOI
10.1111/j.1540-6261.1982.tb01104.x
Publisher site
See Article on Publisher Site

Abstract

The Administrative Costs of Corporate Bankruptcy: A Note JAMES S. ANG, JESS H. CHUA, and JOHN J. MCCONNELL* IN THISPAPER W E present evidence on the direct administrative costs of corporate bankruptcy. The investigation is directed toward providing evidence that may be helpful in answering questions about the role of bankruptcy costs as a determinant of corporate capital structures. The importance of bankruptcy costs as a determinant of corporate financing policy has been extensively debated in the finance literature. The origins of the debate can be traced to Modigliani and Miller [8] and Robichek and Myers [9]. Under the assumption that debt is default-free and interest payments are taxdeductible, Modigliani and Miller demonstrated that firms will maximize their market values by maximizing their use of debt financing. Robichek and Myers demonstrated that this conclusion also holds when debt is not default-free, but bankruptcy is costless. To explain observed corporate debt to total value ratios, which typically fall in the range of 20 percent to 30 percent, Robichek and Myers [9] and Baxter [l] appealed to the existence of bankruptcy costs as a possible counterweight to the tax-deductibility of interest payments. Subsequently, Kraus and Litzenberger [5], Scott [lo], Lee

Journal

The Journal of Finance – Wiley

Published: Mar 1, 1982

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