The magnitude and Cyclical Behavior of Financial Market Frictions

Figure 11

Estimates Without Credit Rating Effects

NLLS Estimates of the Bankruptcy Cost Parameter μ

Note. The shaded region represents +/- two standard error bands computed using a
heteroscedasticity-consistent asymptotic covariance matrix. The model includes fixed industry
(3-digit NAICS) effects.

¹ See Figure 6.

Recovery Rates on Defaulted Bonds

Percent

1 Average model-implied recovery rate weighted by the book value of bonds outstanding.

² Average recovery rate at default weighted by the book value of the defaulted bond issue
(four-quarter moving average).

³ See Figure 7.

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