Indirect costs of financial distress

Indirect costs of financial distress

Costs such as lost business as a result of bankruptcy or liquidation.

Indirect Costs of Financial Distress

Revenue or profit that a company could have made, had it not gone bankrupt. Indirect costs of financial distress are lost business that occurs because potential customers do not wish to take the risk of using a company that may not be able to deliver its goods or services. As with other indirect costs, the indirect costs of financial distress are difficult to calculate with certainty.
References in periodicals archive ?
Moreover, our paper expands the large body of literature that explores the indirect costs of financial distress (see, for example, Opler and Titman, 1994; Andrade and Kaplan, 1998).
These behaviors lead to indirect costs of financial distress, discouraging leverage and reducing overall firm value.
First, indirect costs of financial distress are likely to be much larger than the direct costs associated with bankruptcy (see, for example, Altman, (1984).
Some new proxies are proposed for the costs of illiquidity and the indirect costs of financial distress. These include Tobin's q, R&D and advertising expenditures, an index of asset specificity and an index of the probability of bankruptcy.
In this section, I have discussed a number of ways in which the careful design of financing structures in LBOs can reduce the expected direct and indirect costs of financial distress. As an empirical matter, however, relatively little is known about how frequently these approaches to financial design are used.(7) Moreover, even when used, these financing methods may turn out not to have the desired effect.