The role of asset payouts in the estimation of default barriers

In the barrier option model of corporate security valuation, firm’s creditors impose a default-triggering on firm value to protect their claim. Two disputed issues in literature are whether implied default is positive, and it above or below book liabilities. We extend Brockman Turtle (2003) by embedding asset payouts valuation shareholders’ equity. Using sample US stocks from NYSE, AMEX, NASDAQ exchanges, our paper exploits market information compute for thirty 2-digit SIC groups, including industrials banks. Our results show that lower than received literature, can be less total liabilities, even zero some firms. The physical probabilities significantly presence payouts, providing closer fit historical rates, particularly issuers speculative-grade bonds. • introduce valuation. approximate present dividends as limit multi-level annuity with bankruptcy risk. derive estimates stock prices. liabilities two-thirds closely rates.