TY  - JOUR
AU  - Hovakimian,Armen
AU  - Kayhan,Ayla
AU  - Titman,Sheridan
TI  - Are Corporate Default Probabilities Consistent with the Static Tradeoff Theory?
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 17290
PY  - 2011
Y2  - August 2011
UR  - http://www.nber.org/papers/w17290
L1  - http://www.nber.org/papers/w17290.pdf
N1  - Author contact info:
Armen Hovakimian
Department of  Economics and Finance
Baruch College Zicklin School of Business
1 Bernard Baruch Way
New York, NY 10010
Tel: 646-312-3490
Fax: 646-312-3451
E-Mail: Armen_Hovakimian@baruch.cuny.edu

Ayla Kayhan
Department of Finance
E.J. Ourso School of Business
Louisiana State University
Baton Rouge, LA 70803
Tel: 512/785-4995
E-Mail: akayhan@lsu.edu

Sheridan Titman
Finance Department
McCombs School of Business
University of Texas at Austin
Austin, TX 78712-1179
Tel: 512/232-2787
Fax: 512/471-5073
E-Mail: titman@mail.utexas.edu
AB  - Default probability plays a central role in the static tradeoff theory of capital structure.  We directly test this theory by regressing the probability of default on proxies for costs and benefits of debt. Contrary to predictions of the theory, firms with higher bankruptcy costs, i.e., smaller firms and firms with lower asset tangibility, choose capital structures with higher bankruptcy risk. Further analysis suggests that the capital structures of smaller firms with lower asset tangibility, which tend to have less access to capital markets, are more sensitive to negative profitability and equity value shocks, making them more susceptible to bankruptcy risk.
ER  -