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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

Suggested Citation

  • Julio Pindado & Luis Rodrigues, 2005. "Determinants of Financial Distress Costs," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 19(4), pages 343-359, December.
  • Handle: RePEc:kap:fmktpm:v:19:y:2005:i:4:p:343-359
    DOI: 10.1007/s11408-005-6456-4
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    2. Ahsan Habib & Mabel D' Costa & Hedy Jiaying Huang & Md. Borhan Uddin Bhuiyan & Li Sun, 2020. "Determinants and consequences of financial distress: review of the empirical literature," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 60(S1), pages 1023-1075, April.
    3. Serhiy Zabolotnyy & Mirosław Wasilewski, 2019. "The Concept of Financial Sustainability Measurement: A Case of Food Companies from Northern Europe," Sustainability, MDPI, Open Access Journal, vol. 11(18), pages 1-16, September.
    4. Idrees, Sahar & Qayyum, Abdul, 2018. "The Impact of Financial Distress Risk on Equity Returns: A Case Study of Non-Financial Firms of Pakistan Stock Exchange," MPRA Paper 85346, University Library of Munich, Germany.
    5. Sabau Catalin, 2015. "Profitability Evaluation Methods – A Strategy For Romanian Companies To Avoid Insolvency," Annals - Economy Series, Constantin Brancusi University, Faculty of Economics, vol. 1, pages 142-146, January.
    6. Stefan Erdorf & Nicolas Heinrichs, 2011. "Co-movement of revenue: structural changes in the business cycle," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 25(4), pages 411-433, December.
    7. Sumaira Ashraf & Elisabete G. S. Félix & Zélia Serrasqueiro, 2019. "Do Traditional Financial Distress Prediction Models Predict the Early Warning Signs of Financial Distress?," Journal of Risk and Financial Management, MDPI, Open Access Journal, vol. 12(2), pages 1-17, April.
    8. 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;Swiss Society for Financial Market Research, vol. 21(1), pages 45-67, March.

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