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Financial Distress Costs

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Financial distress costs
Legal and administrative costs of liquidation or reorganization. Also includes implied costs associated with impaired ability to do business (indirect costs).

Financial Distress Cost
The cost of liquidation. Financial distress costs include fees for lawyers and money needed to file paperwork. They also include the losses incurred from slowing or ceasing operations.


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Financial Distress Costs and Taxes Cash flow volatility can lead to situations in which a firm's available liquidity is not sufficient to fully meet fixed payment obligations, such as wages and interest payments, on time.
The larger value effects in our results could also be due to institutional differences in the bankruptcy codes between the UK and the US that cause higher expected financial distress costs for UK firms and therefore greater benefits generated by hedging.
The root of the difference between the callability status of the convertible debt in this model and Stein's model is that in the Stein model only equityholders benefit from conversion, through a reduction of financial distress costs upon conversion.
 
 
 
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