Investment opportunities and bankruptcy prediction |
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Authors: | Evgeny Lyandres Alexei Zhdanov |
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Institution: | 1. School of Management, Boston University, Boston MA 02215, United States;2. IDC, Israel;3. Ecole des HEC, University of Lausanne, Extranef 237, CH-1015, Switzerland |
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Abstract: | A firm's mix of growth options and assets in place is an important determinant of its optimal default strategy. Our simple model shows that shareholders of a firm with valuable investment opportunities would be able/willing to wait longer before defaulting on their contractual debt obligations than shareholders of an otherwise identical firm without such opportunities. More importantly, we show empirically using a dataset of recent corporate bankruptcies that measures of investment opportunities are significantly related to the likelihood of bankruptcy. Augmenting existing bankruptcy prediction models by these measures improves their out-of-sample forecasting ability. |
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