Aswath Damodaran 294
The Bankruptcy Cost Proposition
! Proposition 2 : Other things being equal, the greater the indirect bankruptcy
cost and/or probability of bankruptcy in the operating cashflows of the firm,
the less debt the firm can afford to use.
Both the cost of bankruptcy and the probability of bankruptcy go into the
expected cost. A firm can have a high expected bankruptcy cost when either or
both is high.
If governments step in and provide protection to firms that get into financial
trouble, they are reducing the expected cost of bankruptcy. Under that scenario,
you would expect firms to borrow more money. (See South Korea)
