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Understanding the Recovery Rates on Defaulted Securities

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Author Info
Acharya, Viral V
Bharath, Sreedhar T
Srinivasan, Anand

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Abstract

We document empirically the determinants of the observed recovery rates on defaulted securities in the United States over the period 1982–1999. The recovery rates are measured using the prices of defaulted securities at the time of default and at the time of emergence from default or from bankruptcy. In addition to seniority and security of the defaulted securities, industry conditions at the time of default are found to be robust and important determinants of the recovery rates. In particular, recovery in a distressed state of the industry (median annual stock return for the industry firms being less than -30%) is lower than the recovery in a healthy state of the industry by 10 to 20 cents on a dollar depending on the measure of recovery employed. The determinants of recovery rates appear to be different from the firm-specific determinants of default risk of the firm. Our results underscore the existence of substantial variability in recoveries, in the cross-section of securities as well as in the time-series, and suggest that in order to capture recovery risk, the credit risk models require an industry factor in addition to the factor representing the firm value.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4098.

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Date of creation: Oct 2003
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Handle: RePEc:cpr:ceprdp:4098

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Related research
Keywords: bankruptcy; credit risk; default; distressed securities; recovery;

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Find related papers by JEL classification:
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Viral Acharya & Tanju Yorulmazer, . "Too many to fail - an analysis of time-inconsistency in bank closure policies," Bank of England working papers 319, Bank of England. [Downloadable!]
    Other versions:
  2. Dragon Tang & Hong Yan, 2006. "Macroeconomic Conditions, Firm Characteristics, and Credit Spreads," Journal of Financial Services Research, Springer, vol. 29(3), pages 177-210, June. [Downloadable!] (restricted)
  3. Acharya, Viral V & Yorulmazer, Tanju, 2005. "Cash-in-the-Market Pricing and Optimal Bank Bailout Policy," CEPR Discussion Papers 5154, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  4. Heitor Almeida & Thomas Philippon, 2005. "The Risk-Adjusted Cost of Financial Distress," NBER Working Papers 11685, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  5. Dirk Hackbarth & Junjian Miao & Erwan Morellec, 2005. "Capital Structure, Credit Risk, and Macroeconomic Conditions," Boston University - Department of Economics - Macroeconomics Working Papers Series WP2005-005, Boston University - Department of Economics. [Downloadable!]
    Other versions:
  6. Carling, Kenneth & Rönnegård, Lars & Roszbach, Kasper, 2004. "Is Firm Interdependence within Industries Important for Portfolio Credit Risk?," Working Paper Series 168, Sveriges Riksbank (Central Bank of Sweden). [Downloadable!]
  7. Klaus Rheinberger & Martin Summer, 2008. "Credit portfolio risk and asset price cycles," Computational Management Science, Springer, vol. 5(4), pages 337-354, October. [Downloadable!] (restricted)
  8. Acharya, Viral V & John, Kose & Sundaram, Rangarajan K, 2005. "Cross-Country Variations in Capital Structures: The Role of Bankruptcy Codes," CEPR Discussion Papers 4916, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  9. Stefan Denzler & Michel M. Dacorogna & Ulrich A. Mueller & Alexander McNeil, 2005. "From Default Probabilities To Credit Spreads: Credit Risk Models Do Explain Market Prices," Finance 0504011, EconWPA. [Downloadable!]
    Other versions:
  10. Düllmann, Klaus & Trapp, Monika, 2004. "Systematic Risk in Recovery Rates: An Empirical Analysis of US Corporate Credit Exposures," Discussion Paper Series 2: Banking and Financial Studies 2004,02, Deutsche Bundesbank, Research Centre. [Downloadable!]
  11. Daniel M. Covitz & Song Han & Beth Anne Wilson, 2006. "Are longer bankruptcies really more costly?," Finance and Economics Discussion Series 2006-27, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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