Determinants of Bankruptcy: Evidence From Financially Distressed Firms

Abstract

This study examines whether and how external monitoring, managerial ability, and investment decisions impact a financially distressed firm’s probability of future bankruptcy. We find that a financially distressed firm with higher institutional ownership or higher managerial ability is less likely to file for bankruptcy. Additionally, a financially distressed firm’s non-capital expenditure investment is negatively associated with its probability of bankruptcy. This study provides empirical evidence that external monitoring, competence of management, and non-capital expenditure investment should be considered when predicting bankruptcy among financially distressed firms. Our results are of particular interest to managers, lenders, financial institutions, and credit rating agencies.