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Determinants of Financial Distress Costs

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  • Julio Pindado

    ()

  • Luis Rodrigues

    ()

Abstract

This paper provides international evidence on financial distress costs. To achieve this aim, we have developed a model where financial distress costs are determined, on the one hand, by making use of a more accurate indicator of the probability of financial distress and, on the other, by a set of variables that, according to financial theory, explain the magnitude of the costs borne by a firm in the case of financial distress. Our results reveal the relevance of our improved indicator of the probability of financial distress, since it positively affects financial distress costs in all the countries analyzed. Furthermore, since our model controls for the probability of financial distress, we can test the trade-off between the benefits and costs of debt. This allows us to verify that the benefits debt outweigh the costs. Our results also indicate that distress costs are negatively related to liquid assets; hence, their benefits more than offset their opportunity costs. Copyright Swiss Society for Financial Market Research 2005

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Bibliographic Info

Article provided by Springer in its journal Financial Markets and Portfolio Management.

Volume (Year): 19 (2005)
Issue (Month): 4 (December)
Pages: 343-359

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Handle: RePEc:kap:fmktpm:v:19:y:2005:i:4:p:343-359

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Web page: http://www.springerlink.com/link.asp?id=119763

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Cited by:
  1. Rainer Lauterbach & Isabell Welpe & Jan Fertig, 2007. "Performance differentiation: cutting losses and maximizing profits of private equity and venture capital investments," Financial Markets and Portfolio Management, Springer, vol. 21(1), pages 45-67, March.
  2. Stefan Erdorf & Nicolas Heinrichs, 2011. "Co-movement of revenue: structural changes in the business cycle," Financial Markets and Portfolio Management, Springer, vol. 25(4), pages 411-433, December.
  3. Günter Franke & Julia Hein, 2008. "Securitization of mezzanine capital in Germany," Financial Markets and Portfolio Management, Springer, vol. 22(3), pages 219-240, September.

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