Determinants of Financial Insolvency Costs: New Evidence from International Data

40 Pages Posted: 31 Aug 2004

See all articles by Julio Pindado

Julio Pindado

University of Salamanca - Administration and Business Economics

Luis Fernandes Rodrigues

Escola Superior de Tecnologia de Viseu

Chabela de la Torre

University of Salamanca - Administration and Business Economics

Date Written: March 2004

Abstract

This study examines the determinants of financial insolvency costs, by making use of a more accurate indicator of the probability of insolvency and considering the effect of institutional differences on these costs. We find that insolvency costs are positively related to the probability of financial insolvency, and negatively related to leverage and the holding of liquid assets. Insolvency costs increase with underinvestment processes, which in turn emerge as a consequence of the high probability of financial insolvency. Employment reductions are also a widespread practice for reacting to the crisis, even though the effect of this policy on insolvency costs depends on institutional differences. Finally, the sensitivity of insolvency costs to the probability of financial insolvency, leverage and the holding of liquid assets depends on the institutional context as well.

Keywords: Financial distress, insolvency costs, leverage, investment, employment

JEL Classification: G33

Suggested Citation

Pindado, Julio and Fernandes Rodrigues, Luis and de la Torre, Chabela, Determinants of Financial Insolvency Costs: New Evidence from International Data (March 2004). Available at SSRN: https://ssrn.com/abstract=528082 or http://dx.doi.org/10.2139/ssrn.528082

Julio Pindado

University of Salamanca - Administration and Business Economics ( email )

Campus Miguel de Unamuno
Salamanca, ES-37007
Spain
+34 923 294640 (Phone)
+34 923 294715 (Fax)

Luis Fernandes Rodrigues

Escola Superior de Tecnologia de Viseu ( email )

Viseu, 3504-510
Portugal

Chabela De la Torre (Contact Author)

University of Salamanca - Administration and Business Economics ( email )

Campus Miguel de Unamuno
Salamanca, ES-37007
Spain

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