Non-linearity in the impact of bankruptcy risk on leverage

Research output: Chapter in Book/Report/Conference proceedingBook chapter


The paper investigates the effect of bankruptcy risk on firms’ financing decisions. More specifically, we analyze if a higher probability of bankruptcy reduces incentives for debt financing due to an increase in expected bankruptcy cost. We argue that an increase in bankruptcy risk affects financial decisions only when the probability of bankruptcy is sufficiently high. We therefore model a nonlinear relationship between changes in leverage and bankruptcy risk. Our findings show that an increase in bankruptcy risk has a negative impact on changes in leverage and the impact is clearly nonlinear.


Research areas and keywords

Subject classification (UKÄ) – MANDATORY

  • Business Administration
Original languageEnglish
Title of host publicationEssays on Financial Risks and the Subprime Crisis
EditorsEmanuel Alfranseder
Place of PublicationLund
PublisherLund University
Number of pages19
ISBN (Print)978-91-7623-303-0
Publication statusPublished - 2015
Publication categoryResearch

Publication series

NameLund Economic Studies
PublisherLund University
ISSN (Print)0460-0029

Related research output

Emanuel Alfranseder, 2015, 157 p.

Research output: ThesisDoctoral Thesis (compilation)

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