Financial Distress and Corporate Performance

Posted: 20 Dec 1998

See all articles by Tim C. Opler

Tim C. Opler

Credit Suisse First Boston

Sheridan Titman

University of Texas at Austin - Department of Finance; National Bureau of Economic Research (NBER)

Date Written: March 1994

Abstract

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

Opler, Tim C. and Titman, Sheridan, Financial Distress and Corporate Performance (March 1994 ). Available at SSRN: https://ssrn.com/abstract=5425

Tim C. Opler (Contact Author)

Credit Suisse First Boston ( email )

11 Madison Avenue
Investment Banking Div., 23rd Flr
New York, NY 10010
United States
(212) 328-5313 (Phone)
(212) 448-3410 (Fax)

Sheridan Titman

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States
512-232-2787 (Phone)
512-471-5073 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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