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.
|Title of host publication||Essays on Financial Risks and the Subprime Crisis|
|Place of Publication||Lund|
|Number of pages||19|
|Publication status||Published - 2015|
|Name||Lund Economic Studies|
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Research output: Thesis › Doctoral Thesis (compilation)
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