IDEAS home Printed from https://ideas.repec.org/a/prg/jnlcfu/v2014y2014i3id408p46-58.html
   My bibliography  Save this article

Cost of Financial Distress in the Cash Flow Model of Capital Structure
[Náklady finanční tísně v cash flow modelech kapitálové struktury]

Author

Listed:
  • Tomáš Buus

Abstract

Since the Miller and Modigliani (1958, 1963) theory of capital structure the literature struggles to include cost of financial distress in the cash flow theories of capital structure. Besides that most of the recent models are static. Let us just remind the contributions by Cooper, and Nyborg (2006), Farber, Gillet, and Szafarz (2006), Qi, Liu and Johnson (2012) or Fernández's (2004, 2007) analysis of their predecessors' work. This paper brings dynamic, and risk consistent (in the meaning of return being purely growing function of risk), although regarding the quantification of financial distress cost somewhat simplified model. His advantage is simplicity and observability of all its exogenous (input) variables. However, the clarification of relationship between face and market value of debt, and empirical test of model are needed.

Suggested Citation

  • Tomáš Buus, 2014. "Cost of Financial Distress in the Cash Flow Model of Capital Structure [Náklady finanční tísně v cash flow modelech kapitálové struktury]," Český finanční a účetní časopis, Prague University of Economics and Business, vol. 2014(3), pages 46-58.
    • Handle: RePEc:prg:jnlcfu:v:2014:y:2014:i:3:id:408:p:46-58
    DOI: 10.18267/j.cfuc.408
    as

    Download full text from publisher

    File URL: http://cfuc.vse.cz/doi/10.18267/j.cfuc.408.html
    Download Restriction: free of charge
    File URL: http://cfuc.vse.cz/doi/10.18267/j.cfuc.408.pdf
    Download Restriction: free of charge
    File URL: https://libkey.io/10.18267/j.cfuc.408?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Cooper, Ian A. & Nyborg, Kjell G., 2006. "The value of tax shields IS equal to the present value of tax shields," Journal of Financial Economics, Elsevier, vol. 81(1), pages 215-225, July.
    2. André Farber & Roland Gillet & Ariane Szafarz, 2005. "A general formula for the WACC," Working Papers CEB 05-012.RS, ULB -- Universite Libre de Bruxelles.
    3. Stephen A. Ross, 2013. "The Arbitrage Theory of Capital Asset Pricing," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 1, pages 11-30, World Scientific Publishing Co. Pte. Ltd..
    4. repec:bla:jfinan:v:53:y:1998:i:5:p:1443-1493 is not listed on IDEAS
    5. Richard S Ruback, 2002. "Capital Cash Flows: A Simple Approach to Valuing Risky Cash Flows," Financial Management, Financial Management Association, vol. 31(2), Summer.
    6. Howard Qi & Sheen Liu & Dean Johnson, 2012. "A model for risky cash flows and tax shields," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 36(4), pages 868-881, October.
    7. Arthur Korteweg, 2010. "The Net Benefits to Leverage," Journal of Finance, American Finance Association, vol. 65(6), pages 2137-2170, December.
    8. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, September.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Michael Dempsey, 2015. "Stock Markets, Investments and Corporate Behavior:A Conceptual Framework of Understanding," World Scientific Books, World Scientific Publishing Co. Pte. Ltd., number p1007, September.
    2. Lucia MICHALKOVA & Tomas KLIESTIK, 2019. "The Role Of Risk In The Valuation Of Tax Shield," Proceedings of the INTERNATIONAL MANAGEMENT CONFERENCE, Faculty of Management, Academy of Economic Studies, Bucharest, Romania, vol. 13(1), pages 218-233, November.
    3. Carlo Mari & Marcella Marra, 2017. "Deterministic discounting of risky cash-flows," Journal of Finance and Investment Analysis, SCIENPRESS Ltd, vol. 6(3), pages 1-2.
    4. Philip Ndikum, 2020. "Machine Learning Algorithms for Financial Asset Price Forecasting," Papers 2004.01504, arXiv.org.
    5. Fernandez, Pablo, 2006. "A general formula for the WACC: A correction," IESE Research Papers D/663, IESE Business School.
    6. Shigufta Hena Uzma & J.P. Singh & Naveen Kumar, 2010. "Discounted Cash Flow and Its Implication on Intangible Valuation," Global Business Review, International Management Institute, vol. 11(3), pages 365-377, October.
    7. Filippo Ippolito & Roberto Steri & Claudio Tebaldi, 2011. "The Relative Leverage Premium," Working Papers 398, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    8. Andrea Gamba & Gordon A. Sick & Carmen Aranda León, 2008. "Investment under Uncertainty, Debt and Taxes," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 37(1), pages 31-58, February.
    9. Fernandez, Pablo, 2007. "A more realistic valuation: APV and WACC with constant book leverage ratio," IESE Research Papers D/715, IESE Business School.
    10. Shi, Huai-Long & Zhou, Wei-Xing, 2022. "Factor volatility spillover and its implications on factor premia," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 80(C).
    11. Magni, Carlo Alberto, 2009. "Splitting up value: A critical review of residual income theories," European Journal of Operational Research, Elsevier, vol. 198(1), pages 1-22, October.
    12. Shaikh, Salman, 2013. "Investment Decisions by Analysts: A Case Study of KSE," MPRA Paper 53802, University Library of Munich, Germany.
    13. Boes, M.J., 2006. "Index options : Pricing, implied densities and returns," Other publications TiSEM e9ed8a9f-2472-430a-b666-9, Tilburg University, School of Economics and Management.
    14. Roman Mestre, 2021. "A wavelet approach of investing behaviors and their effects on risk exposures," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 7(1), pages 1-37, December.
    15. repec:dau:papers:123456789/2514 is not listed on IDEAS
    16. David Morelli, 2002. "The robustness of tests of structural change in equity returns using factor analysis," Applied Economics, Taylor & Francis Journals, vol. 34(2), pages 241-251.
    17. Robin Maximilian Stetzka & Stefan Winter, 2023. "How rational is gambling?," Journal of Economic Surveys, Wiley Blackwell, vol. 37(4), pages 1432-1488, September.
    18. Mario Alejandro Acosta R., 2014. "Las acciones como activo de reserva para el Banco de la República," Documentos CEDE 11004, Universidad de los Andes, Facultad de Economía, CEDE.
    19. Ralf Diedrich & Stefan Dierkes & Hans-Christian Gröger, 2022. "A note on the cost of capital with fixed payout ratios," Review of Quantitative Finance and Accounting, Springer, vol. 59(4), pages 1559-1575, November.
    20. Ahmed, Shamim & Liu, Xiaoquan & Valente, Giorgio, 2016. "Can currency-based risk factors help forecast exchange rates?," International Journal of Forecasting, Elsevier, vol. 32(1), pages 75-97.
    21. Moon K. Kim & Chunchi Wu, 1987. "Macro-Economic Factors And Stock Returns," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 10(2), pages 87-98, June.

    More about this item

    Keywords

    Capital structure; Cost of financial distress; Tax shield; Equity; Debt; Kapitálová struktura; Náklady finanční tísně; Daňový štít; Vlastní kapitál; Cizí kapitál;
    All these keywords.

    JEL classification:

    • C67 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Input-Output Models
    • D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:prg:jnlcfu:v:2014:y:2014:i:3:id:408:p:46-58. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Stanislav Vojir (email available below). General contact details of provider: https://edirc.repec.org/data/uevsecz.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.