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Earnings Retention as a Specification Mechanism in Predicting Corporate Bankruptcy

In: Excess Cash Flow

Author

Listed:
  • Rahul Dhumale

Abstract

Chapter 4 estimated a model for finance strategy based on firm quality using Indian data. Chapter 5 extends this analysis by assessing the influence of a firm’s capital structure on the probability of bankruptcy. The aim is to find if retained earnings are more significant relative to bankruptcy in firms with fewer investment opportunities (i.e., low q vs. high q firms). Bankruptcy theory provides a framework combining corporate financial structure, relationship between debt and equity, the composition and ownership of corporate debt, and the structure of share ownership. Leverage becomes an important consideration as it can shift the balance of bargaining power during bankruptcy. This exacerbates asymmetric information between debtors, creditors, and equity holders encouraging low-quality firms to continue overinvesting.

Suggested Citation

  • Rahul Dhumale, 2003. "Earnings Retention as a Specification Mechanism in Predicting Corporate Bankruptcy," Palgrave Macmillan Books, in: Excess Cash Flow, chapter 5, pages 114-150, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-0-230-50951-1_5
    DOI: 10.1057/9780230509511_5
    as

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