Financial Distress and Corporate Performance
Posted: 20 Dec 1998
Date Written: March 1994
This study finds that highly levered firms lose substantial market share to their more conservatively financial competitors in industry downturns. Specifically, firms in the top leverage decile which experience output contractions see their sales decline by 26 percent more than do firms in the bottom leverage decile. A similar decline takes place in the market value of equity. These findings are consistent with the view that the indirect costs of financial distress are significant and positive. Consistent with the theory that firms with specialized products are especially vulnerable to financial distress, we find that highly leveraged firms which engage in research and development suffer the most in economically distressed periods. We also find that the adverse consequences of leverage are more pronounced in concentrated industries.
JEL Classification: G30, G33
Suggested Citation: Suggested Citation