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Direct Costs of Financial Distress

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Direct costs of financial distress
Costs such as fees or penalties incurred as a result of bankruptcy or liquidation proceedings.

Direct Costs of Financial Distress
Any fees or penalties that result from a bankruptcy or liquidation. An obvious example is the fee one must pay to a bankruptcy attorney. However, other fees, perhaps broker fees resulting from the liquidation of stock, may also be attached.


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Reexamining the direct costs of financial distress is important because many debt restructurings in the late 80s and early 90s involved prepackaged bankruptcy, failed HLTs, vulture investors, and informal pre-restructuring bondholder committees.
1993) argue that smaller firms are more likely to hedge than larger firms, because the direct costs of financial distress are less than proportional to firm size.
In an effort to identify the sources of the economic gains associated with this form of restructuring, I study 49 prepackaged bankruptcies filed between 1986 and 1993 I first examine the direct costs of financial distress and the actions that the sample firms take to minimize the indirect costs of financial distress.
 
 
 
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