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How Costly is Financial (Not Economic) Distress? Evidence from Highly Leveraged Transactions that Became Distressed

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  • Gregor Andrade

    (Graduate School of Business, University of Chicago,)

  • Steven N. Kaplan

    (Graduate School of Business, University of Chicago and National Bureau of Economic Research)

Abstract

This paper studies thirty-one highly leveraged transactions (HLTs) that become financially, not economically, distressed. The net effect of the HLT and financial distress (from pretransaction to distress resolution, market- or industry-adjusted) is to increase value slightly. This finding strongly suggests that, overall, the HLTs of the late 1980s created value. We present quantitative and qualitative estimates of the (direct and indirect) costs of financial distress and their determinants. We estimate financial distress costs to be 10 to 20 percent of firm value. For a subset of firms that do not experience an adverse economic shock, financial distress costs are negligible. Copyright The American Finance Association 1998.

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Bibliographic Info

Article provided by American Finance Association in its journal The Journal of Finance.

Volume (Year): 53 (1998)
Issue (Month): 5 (October)
Pages: 1443-1493

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Handle: RePEc:bla:jfinan:v:53:y:1998:i:5:p:1443-1493

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  1. Bronwyn H. Hall, 1989. "The Impact of Corporate Restructuring on Industrial Research and Development," NBER Working Papers 3216, National Bureau of Economic Research, Inc.
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  10. Alderson, Michael J. & Betker, Brian L., 1995. "Liquidation costs and capital structure," Journal of Financial Economics, Elsevier, vol. 39(1), pages 45-69, September.
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