BANKRUPTCY COSTS: SOME EVIDENCE

ASSUMPTIONS ABOUT THE MAGNITUDE OF BANKRUPTCY COSTS WILL HAVE A CONSIDERABLE BEARING ON THE ISSUE OF HOW MUCH DEBT IT IS OPTIMAL FOR THE FIRM TO HAVE IN ITS CAPITAL-STRUCTURE. ISSUES ARE CONSIDERED SURROUNDING THE ROLE OF BANKRUPTCY COSTS IN MODELS OF CAPITAL STRUCTURE. EVIDENCE ON THE DIRECT COSTS OF CORPORATE BANKRUPTCY IS PRESENTED FOR A NUMBER OF RAILROADS WHICH WERE IN BANKRUPTCY PROCEEDINGS UNDER SECTION 77 OF THE BANKRUPTCY ACT BETWEEN 1933 AND 1955. THE RATIO OF DIRECT BANKRUPTCY COSTS TO THE MARKET VALUE OF THE FIRM APPEARS TO FALL AS THE VALUE OF THE FIRM INCREASES. THE COST OF BANKRUPTCY IS, ON AVERAGE, ABOUT ONE PERCENT OF THE MARKET VALUE OF THE FIRM PRIOR TO BANKRUPTCY. NOT ALL BANKRUPTCY COSTS ARE MEASURABLE, DIRECT COSTS. GRAPHS. TABLES. REFERENCES.