Have library access?


The objective of this study is to reach significant determinants of corporate debt ratio that help avoid bankruptcy risk. The study defines Debt Ratio Safe Buffer as the difference between zero-default debt ratio and the observed debt ratio. As far as finance managers are able to manage capital structure in a way that preserves positive 〞Debt Ratio Safe Buffer,〞 corporate financial resources as well as shareholders' wealth are managed efficiently. The authors operationalize the statistical properties of Black-Scholes option pricing model to estimate a debt ratio associated with zerodefault probability. This study uses data for the firms listed in DJIA30 and NASDAQ100. The data cover quarterly intervals covering the period 30th June 1989 ~ 31st March 2011. The methods of econometric estimation in this study include (1) tests for linearity versus non-linearity, (2) tests for normality, (3) tests for fixed versus random effects, (4) Cointegration analysis that tests for model specification and (5) classical regression that estimates the determinants of 〞Debt Ratio Safe Buffer.〞 The results conclude that: (1) the coefficient of speed of adjusting debt ratio safe buffer in a previous quarter to a target debt ratio safe buffer is relatively high and statistically significant. This high speed of adjustment shows that firms determine debt ratios in a way that does not cause an exposure to bankruptcy risk. (2) firms adjust debt ratio to a safe buffer in the long term rather than short term, (3) the assumptions of the trade-off and peckingorder theories are quite valid and can be utilized to manage debt ratio safe buffer effectively, (4) firms have financed expansions in fixed assets and sales using zero-default debt, (5) nevertheless, firms are not able to reach an optimal liquidity strategy that helps minimize debt financing. As far as debt financing is associated with bankruptcy risks, debt ratios might be high enough to expose a firm to bankruptcy risk. In this study, the mathematical algorithm and measurement of the variables offer the advantage of using the negative coefficients of the significant variables as proxies for financial risks (e.g., narrowing 〞Debt Ratio Safe Buffer〞). Otherwise, positive coefficients can be used for monitoring bankruptcy risks. If firms determine the debt ratio being less than zero-default debt ratio, firms as well as shareholders can achieve substantial benefits given that the probability of bankruptcy is eliminated.


Agmon, T.,Ofer, A. R.,Tamir, A.(1981).Variable rate debt instruments and corporate debt policy.The Journal of Finance.36,113-125.
Akhtar, S.,Oliver, B.(2009).Determinants of capital structure for Japanese multinational and domestic corporations.International Review of Finance.9,1-26.
Altman, E. I.(1968).Financial ratios, discriminant analysis, and the prediction of corporate bankruptcy.The Journal of Finance.23,589-609.
Altman, E. I.(1984).A further empirical investigation of the bankruptcy cost question.The Journal of Finance.39,1067-1089.
Altman, E. I., Resti, A., & Sironi, A. (2002). The link between default and recovery rates: Effects on the procyclicality of regulatory capital ratios. Working paper, Bank of International Settlements, Basel, Switzerland.