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Distress cost and corporate financing policy: evidence from the equity options market

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  • Yongkil Ahn

Abstract

This study examines the link between distress cost and corporate financing policy through the lens of the equity options market. Four features stand out. First, the cost of distress is comparable to the tax shield from debt financing. Second, the results provide evidence that ordinary least-squares estimates understate the impact of market leverage on default risk. Third, consistent with the information models of debt maturity, firms with higher default probability use more long-term debt. Finally, more distressed firms rely on secured debt to a greater extent. Overall, the results support the trade-off theory of capital structure.

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  • Yongkil Ahn, 2019. "Distress cost and corporate financing policy: evidence from the equity options market," Applied Economics, Taylor & Francis Journals, vol. 51(39), pages 4299-4312, August.
    • Handle: RePEc:taf:applec:v:51:y:2019:i:39:p:4299-4312
    DOI: 10.1080/00036846.2019.1591602
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    Cited by:

    1. Tabash, Mosab I. & Farooq, Umar & Ashfaq, Khurram & Tiwari, Aviral Kumar, 2022. "Economic policy uncertainty and financing structure: A new panel data evidence from selected Asian economies," Research in International Business and Finance, Elsevier, vol. 60(C).

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