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Ex Ante Estimation of a Firm's Distress Risk Parameters from Bond Transaction Data

Author

Listed:
  • Sugato Chakravarty

    (Purdue University)

  • Padma Kadiyala

    (Pace University, New York)

Abstract

In this paper, we exploit the information in a publicly traded company’s stock and bond prices to es-timate its default probability and recovery rate. We document that estimated probabilities of default and recovery rates exhibit cross-sectional variation with the ratio of book to market equity and with industry affiliation. Additionally, dividend yield, and the term premium in Treasury bond yields influ-ence temporal variation in aggregate probabilities of default and in recovery rates. Such findings provide a deeper understanding of how default probability and recovery rate interact to determine the outcome when a firm ends up in financial distress.

Suggested Citation

  • Sugato Chakravarty & Padma Kadiyala, "undated". "Ex Ante Estimation of a Firm's Distress Risk Parameters from Bond Transaction Data," Working Papers 1001, Purdue University, Department of Consumer Sciences.
    • Handle: RePEc:csr:wpaper:1001
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    More about this item

    Keywords

    Discouraged borrowers; emerging economies; credit rationing; relationships;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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