The Probability Distribution of Bankruptcy upon New Debt Issuances

Dror Parnes

Abstract


This study theoretically examines the probability distribution of corporate bankruptcy upon new debt issuances. We develop a relatively simple Markov model with three feasible corporate phases, derive the stochastic transition rates and the time-related probabilities to remain in each business cycle, and further simulate realistic corporate paths. We find that when both corporate debt and assets are stochastic, the probability to be in Chapter 11 is generally lower among borrowers that portray higher debt variability. Moreover, we detect that the most probable time to be in bankruptcy occurs within two or three years of a new debt issuance.

Full Text: PDF DOI: 10.5539/ijef.v5n4p21

Creative Commons License
This work is licensed under a Creative Commons Attribution 3.0 License.

International Journal of Economics and Finance  ISSN  1916-971X (Print) ISSN  1916-9728 (Online)

Copyright © Canadian Center of Science and Education

To make sure that you can receive messages from us, please add the 'ccsenet.org' domain to your e-mail 'safe list'. If you do not receive e-mail in your 'inbox', check your 'bulk mail' or 'junk mail' folders.