Endogenous Bankruptcy And Expected Recovery
Source: Queen's University
Using a large sample of filings from 1996 to 2007 the authors find that the endogenously determined expected recovery derived from Leland and Toft (1996) has strong explanatory power on debt recovery observed in the market. Their results hold after firm characteristics, industry distress, and macroeconomic conditions are accounted for. In addition, they find that agency conflicts and ex post bankruptcy costs both contribute to the explanatory power of expected recovery on market recovery.