We estimate the costs of financial distress prior to default (pre-default costs) separately from the loss incurred at default (the loss given default) using a dynamic trade-off model of capital structure. We document that pre-default costs are on average equal to 6.5% of firm value per year. We...

Using detailed loan holding data of Collateralized Loan Obligations (CLOs), we document empirical evidence for systemic risk due to leverage constraints on CLOs. Constrained CLOs fire sell loans downgraded to CCC or below, and thus loans widely held by constrained CLOs experience temporarily...

At any point in time, most firms are not in financial distress. This implies that they must suffer value losses unrelated to their leverage before becoming financially distressed. We first show that if estimates of ex-ante distress costs are not filtered of such non-debt related value declines,...