Distress Induced Leverage Adjustments

Abstract

This thesis addresses two key questions: 1) How do bankruptcy costs and probabilities in Norway compare to existing studies, and 2) how do they affect capital structure in the final years before bankruptcy? Our findings reveal that Norway exhibits similar results as the United States, regarding bankruptcy costs and probabilities, averaging 18 to 25 percent and 27 to 34 percent, respectively. This suggests comparable risk profiles between Norwegian firms and their counterparts in terms of financial distress. Additionally, we found that both bankruptcy costs and probabilities have a positive and significant effect on leverage, while firm size exhibits a negative and significant effect on leverage.