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| Capital Structure and the Prediction of Bankruptcy by Suzan Hol of the Norwegian University of Science and Technology, July 2002 Abstract: This paper addresses the theoretical foundations of bankruptcy prediction, using the neo-classical theory of capital structure as a starting point. The paper intends to demonstrate the feasibility of such an approach in a simple setting, i.e. by using a simple theoretical model and a limited empirical analysis. A model of optimal capital structure is constructed and rewritten as a model of default probability. Its empirical implications are derived and tested on a sample of Norwegian data. It is concluded that this approach clearly has its limitations, but also that it may be a valuable contribution compared to the multitude of theory-less empirical studies and a useful alternative to the default theory based on option pricing. Keywords: Default Probabilities, Capital structure, Logistic regression. Books Referenced in this paper: (what is this?)
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