Abstract:
This paper examines the relation between bankruptcy probability and cost of debt using a sample of over 10,000 firms. This study assumes a positive relation between bankruptcy costs are significant and therefore influence capital decision making in firms. The relevance of bankruptcy costs has been recently exhibited by Davydenko, Strebulaev and Zhao (2012) and Glover (2016). First, A logistic regression analysis is used to review the determinants of bankruptcy probability and estimate a bankruptcy probability score for each firm. Consecutively the relation between this bankruptcy probability score and the cost of debt of a firm are examined using both a fixed effects and a random effects model. In addition, possible characteristics of this relation such as non-linearity and an interaction effect are examined.
