Determinants of Financial Distress Costs

Financial Markets and Portfolio Management, Vol. 19, No. 4, pp. 341-360, 2005

Posted: 24 Jan 2006

See all articles by Julio Pindado

Julio Pindado

University of Salamanca - Administration and Business Economics

Luis Fernandes Rodrigues

Escola Superior de Tecnologia de Viseu

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.

Suggested Citation

Pindado, Julio and Fernandes Rodrigues, Luis, Determinants of Financial Distress Costs. Financial Markets and Portfolio Management, Vol. 19, No. 4, pp. 341-360, 2005 , Available at SSRN: https://ssrn.com/abstract=876927

Julio Pindado (Contact Author)

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

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