[{"data":1,"prerenderedAt":-1},["ShallowReactive",2],{"doc-detail-167224-en":3,"doc-seo-167224-105":30,"detail-sidebar-cat-0-en-105":92},{"code":4,"msg":5,"data":6},0,"success",{"doc_id":7,"user_id":8,"nickname":9,"user_avatar":10,"doc_module":4,"category_id":11,"category_name":12,"doc_title":13,"doc_description":14,"doc_content":15,"file_id":16,"file_url":17,"file_type":18,"file_size":19,"view_count":20,"is_deleted":4,"is_public":20,"is_downloadable":20,"audit_status":20,"page_count":21,"language":22,"language_code":23,"site_id":24,"html_lang":23,"table_of_contents":25,"faqs":26,"seo_title":27,"seo_description":14,"update_tm":28,"read_time":29},167224,34359740700684,"Finn","https://ap-avatar.wpscdn.com/avatar/1f400023980c374ae676?_k=1777273430885731487",8,"Research & Report","Journal of Applied Corporate Finance - Volume 20 - Number 4 - Fall 2008","Journal of Applied Corporate Finance, Volume 20, Number 4, Fall 2008, presents a special focus honoring Stewart Myers and examines corporate finance theory and practice. The issue discusses corporate risk management, valuation, capital structure, agency issues, real options, and equity underwriting phenomena. A central paper studies how to value expected financial distress costs by adjusting the probability of distress using risk-neutral approaches derived from corporate bond yield spreads, incorporating systematic risk and showing its impact on estimated distress cost magnitudes.","VOLUME 20 | NUMBER 4 | FALL 2008  \nJournal of  \nAPPLIED CORPORATE FINANCE  \nA M OR GAN STANLEY PUBLICATION  \nIn This Issue: Honoring Stewart Myers  \nThe Contributions of Stewart Myers to the Theory and Practice of Corporate Finance  \n8 Franklin Allen, University of Pennsylvania, Sudipto Bhattacharya, London School of Economics, Raghuram Rajan, University of Chicago, and Antoinette Schoar, MIT  \nMIT Roundtable on Corporate Risk Management  \nRisk Management Failures: What Are They and When Do They Happen?  \nBrealey, Myers, and Allen on Valuation, Capital Structure, and Agency Issues  \nBrealey, Myers, and Allen on Real Options  \nEquity Issues and the Disappearing Rights Offer Phenomenon  \nCan Companies Use Hedging Programs to Profit from the Market? Evidence from Gold Producers  \nCorporate Leverage and Specialized Investments by Customers and Suppliers  \nEstimating Risk-Adjusted Costs of Financial Distress  \n20  \n39  \n49  \n58  \n72  \n86  \n98  \n105  \nPanelists: Judy Lewent, Merck; Donald Lessard and Andrew Lo, MIT; and Lakshmi Shyam-Sunder, International Finance Corporation.  \nModerated by Robert Merton, Harvard Business School.  \nRené Stulz, Ohio State University  \nRichard A. Brealey, London Business School, Stewart C. Myers, MIT, and Franklin Allen, University of Pennsylvania  \nRichard A. Brealey, London Business School, Stewart C. Myers, MIT, and Franklin Allen, University of Pennsylvania  \nB. Espen Eckbo, Dartmouth College  \nTim R. Adam, Humboldt University, and Chitru S. Fernando, University of Oklahoma  \nJayant R. Kale, Georgia State University, and Husayn Shahrur, Bentley College  \nHeitor Almeida, University of Illinois at Urbana-Champaign, and Thomas Philippon, New York University  \nEstimating Risk-Adjusted Costs of Financial Distress  \nby Heitor Almeida, University of Illinois at Urbana-Champaign, and Thomas Philippon, New York University 1  \nF  \ninding the optimal, or value-maximizing, capital structure involves weighing the benefits of higher leverage against the costs. The main benefits of debt are the interest tax shield and, in the case  \nof mature companies with limited growth opportunities, the reduction in the so-called “agency costs of free cash flow”—that is, the loss in value associated with managers’ tendency to waste excess cash and capital on value-destroying projects instead of paying it out to debtholders. The downside of higher leverage is the increase in what academics refer to asthe expected “costs of financial distress,” the costs associated with the greater probability of default and bankruptcy.  \nTo determine their optimal capital structure, managers need good estimates of the benefits and costs of debt. There are well-established methods for measuring the debt tax shield, with some estimates suggesting it can amount to 10-20% of a company’s total value.2 But estimating the cost of financial distress has proved much more difficult and elusive. Such costs include not only litigation fees and direct bankruptcy costs, but less quantifiable effects of financial trouble such as damage to the firm’s reputation, the loss of key employees and customers, and, potentially the largest cost of all, the loss of value from foregone investment opportunities. And these since costs have a direct impact on recovery rates for investors, in a reasonably efficient market they should be reflected in lower bond and equity prices that reflect the possibility of financial distress.  \nIn this paper, we propose a new approach for valuing expected financial distress costs—one that is premised on answering an important but simple question: what is the correct rate for discounting expected distress costs? Studies have estimated various costs associated with financial distress when it takes place, but when, or even if, these costs will be incurred is of course not known with certainty at the time of financing. As a result, the “correct” discount rate that reflects the true risk and uncertainty is difficult to derive.  \nWe avoid thi","cbCailHP3ZXm8QmW","https://ap.wps.com/l/cbCailHP3ZXm8QmW","pdf",408200,1,7,"English","en",105,"# In This Issue: Honoring Stewart Myers\n## The Contributions of Stewart Myers to the Theory and Practice of Corporate Finance\n## MIT Roundtable on Corporate Risk Management\n## Risk Management Failures: What Are They and When Do They Happen?\n## Brealey, Myers, and Allen on Valuation, Capital Structure, and Agency Issues\n## Brealey, Myers, and Allen on Real Options\n## Equity Issues and the Disappearing Rights Offer Phenomenon\n## Can Companies Use Hedging Programs to Profit from the Market? Evidence from Gold Producers\n## Corporate Leverage and Specialized Investments by Customers and Suppliers\n## Estimating Risk-Adjusted Costs of Financial Distress","[{\"question\":\"What question does the paper use to value expected financial distress costs?\",\"answer\":\"It asks what the correct discounting rate for expected distress costs should be under conditions of uncertainty. The paper then reformulates the approach by adjusting distress probabilities instead of the discount rate.\"},{\"question\":\"How does the paper incorporate systematic risk into default probability?\",\"answer\":\"It uses risk premia implied in corporate bond yield spreads to derive a risk-neutral, market-implied probability of default. This accounts for systematic components that increase during recessions.\"},{\"question\":\"Why is estimating financial distress costs considered difficult?\",\"answer\":\"Because future timing and occurrence of distress are uncertain, and costs include both direct items (such as litigation and bankruptcy costs) and less quantifiable effects like reputational harm, loss of employees and customers, and foregone investment opportunities.\"}]","Journal of Applied Corporate Finance - Volume 20 - Number 4 - Fall 2008 | PDF",1788210377,18,{"code":4,"msg":31,"data":32},"ok",{"site_id":24,"language":23,"slug":33,"title":13,"keywords":34,"description":14,"schema_data":35,"social_meta":87,"head_meta":89,"extra_data":91,"updated_unix":28},"journal-of-applied-corporate-finance-volume-20-number-4-fall-2008","",{"@graph":36,"@context":86},[37,54,69],{"@type":38,"itemListElement":39},"BreadcrumbList",[40,44,48,51],{"item":41,"name":42,"@type":43,"position":20},"https://docshare.wps.com","Home","ListItem",{"item":45,"name":46,"@type":43,"position":47},"https://docshare.wps.com/document/","Document",2,{"item":49,"name":12,"@type":43,"position":50},"https://docshare.wps.com/document/research-report/",3,{"item":52,"name":13,"@type":43,"position":53},"https://docshare.wps.com/document/journal-of-applied-corporate-finance-volume-20-number-4-fall-2008/167224/",4,{"url":52,"name":13,"@type":55,"author":56,"headline":13,"publisher":58,"fileFormat":61,"inLanguage":23,"description":14,"dateModified":62,"datePublished":63,"encodingFormat":61,"isAccessibleForFree":64,"interactionStatistic":65},"DigitalDocument",{"name":9,"@type":57},"Person",{"url":41,"name":59,"@type":60},"DocShare","Organization","application/pdf","2026-09-01","2026-08-31",true,{"@type":66,"interactionType":67,"userInteractionCount":20},"InteractionCounter",{"@type":68},"ViewAction",{"@type":70,"mainEntity":71},"FAQPage",[72,78,82],{"name":73,"@type":74,"acceptedAnswer":75},"What question does the paper use to value expected financial distress costs?","Question",{"text":76,"@type":77},"It asks what the correct discounting rate for expected distress costs should be under conditions of uncertainty. The paper then reformulates the approach by adjusting distress probabilities instead of the discount rate.","Answer",{"name":79,"@type":74,"acceptedAnswer":80},"How does the paper incorporate systematic risk into default probability?",{"text":81,"@type":77},"It uses risk premia implied in corporate bond yield spreads to derive a risk-neutral, market-implied probability of default. This accounts for systematic components that increase during recessions.",{"name":83,"@type":74,"acceptedAnswer":84},"Why is estimating financial distress costs considered difficult?",{"text":85,"@type":77},"Because future timing and occurrence of distress are uncertain, and costs include both direct items (such as litigation and bankruptcy costs) and less quantifiable effects like reputational harm, loss of employees and customers, and foregone investment opportunities.","https://schema.org",{"og:url":52,"og:type":88,"og:title":13,"og:site_name":59,"og:description":14},"article",{"robots":90,"canonical":52},"index,follow",{"doc_id":7,"site_id":24},{"code":4,"msg":5,"data":93},[94,98,102,106,111,116,120,123,128,131,135],{"id":20,"doc_module":4,"doc_module_name":46,"category_name":95,"show_sort_weight":96,"slug":97},"Story & Novel",90,"story-novel",{"id":47,"doc_module":4,"doc_module_name":46,"category_name":99,"show_sort_weight":100,"slug":101},"Literature",80,"literature",{"id":53,"doc_module":4,"doc_module_name":46,"category_name":103,"show_sort_weight":104,"slug":105},"Exam",70,"exam",{"id":107,"doc_module":4,"doc_module_name":46,"category_name":108,"show_sort_weight":109,"slug":110},5,"Comic",60,"comic",{"id":112,"doc_module":4,"doc_module_name":46,"category_name":113,"show_sort_weight":114,"slug":115},6,"Technology",50,"technology",{"id":21,"doc_module":4,"doc_module_name":46,"category_name":117,"show_sort_weight":118,"slug":119},"Healthcare",40,"healthcare",{"id":11,"doc_module":4,"doc_module_name":46,"category_name":12,"show_sort_weight":121,"slug":122},30,"research-report",{"id":124,"doc_module":4,"doc_module_name":46,"category_name":125,"show_sort_weight":126,"slug":127},9,"Religion & Spirituality",20,"religion-spirituality",{"id":126,"doc_module":4,"doc_module_name":46,"category_name":129,"show_sort_weight":126,"slug":130},"World Cup","world-cup",{"id":132,"doc_module":4,"doc_module_name":46,"category_name":133,"show_sort_weight":132,"slug":134},10,"Lifestyle","lifestyle",{"id":136,"doc_module":4,"doc_module_name":46,"category_name":137,"show_sort_weight":107,"slug":138},19,"General","general"]