The short term debt vs. long term debt puzzle: a model for the optimal mix

This paper argues that the existing finance literature is inadequate with respect to its coverage of capital structure of small and medium sized enterprises (SMEs). In particular it is argued that the cost of equity (being both conceptually ill defined and empirically non quantifiable) is not applicable to the capital structure decisions for a large proportion of SMEs and the optimal capital structure depends only on the mix of short and long term debt. The paper then presents a model, developed by practitioners for optimising the debt mix and demonstrates its practical application using an Italian firm's debt structure as a case study

Assessing the Time Horizon of Bankruptcy Using Financial Ratios and the Maturity Schedule of Long-Term Debt

This study investigates the multi-period prediction of firm bankruptcy as a multi-alternative problem of Statistical Decision Theory. This approach enables a simultaneous assessment to be made of the prediction of bankruptcy and the time horizon at which the bankruptcy could occur. To illustrate the approach, using U.S. bankruptcy data, a comparative statistical analysis of various financial variables is undertaken to identify four relatively independent financial ratios that have the potential for multi-period bankruptcy forecasting. These ratios characterize the quantity and quality of debt, as well as the firm’s ability to repay the debt. The study also investigates a new type of predictive information- the maturity schedule of a firm’s long-term debt. Bayesian-type forecasting rules are developed that jointly use the financial ratios and maturity schedule factors. The rules noticeably enhance bankruptcy prediction compared with the familiar one-period (two-alternative) Z-score rules of Altman (1968) for bankruptcy within the first one, two or three years. Predictive factors derived from schedule information additionally enhance bankruptcy prediction at distant time horizons