Bankruptcy costs some evidence pdf

View 15 excerpts, references background and results. The investigation is directed toward providing evidence that may be helpful in answering questions about … Expand. View 3 excerpts, references background.

Financial distress can disrupt a durable goods producer's provision of complementary goods and services such as warranties, spare parts and maintenance. This reduces consumers' demand for the core … Expand. View 1 excerpt, references background.

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View 4 excerpts, cites results, background and methods. This paper characterizes when joint financing of two projects through debt increases expected default costs, contrary to conventional wisdom. Separate financing dominates joint financing when … Expand.

View 6 excerpts, cites background. Bankruptcy, absolute priority, and the pricing of risky debt claims. To determine whether … Expand. A Theory of Optimal Capital Structure. This paper presents a multiperiod model of firm valuation derived under the assumptions that bankruptcy is possible and that secondary markets for assets are imperfect. Given the assumption that the … Expand. Therefore, size would enter the regression with a negative sign.

Moreover, large firms are generally more transparent with more media and analyst coverage. Thus, early knowledge of distress may prompt customers to switch to alternative suppliers causing troubled firms to lose market share resulting in increased indirect costs.

Therefore, a positive relation between size and costs is also possible. The size variable is computed as natural log of total assets. Table 1: Determinants of indirect costs and their hypothesized signs Independent variables used in cross-sectional analysis for the determinants of indirect bankruptcy costs. Total Debt is the book value of debt.

Total Assets consist of the book value of debt and the market value of equity. To ensure that causality runs from the regressors to the indirect bankruptcy costs, indirect bankruptcy costs are measured at t-1 while all the independent variables are measured at t-2 relative to the year of Chapter 11 announcement. Yao 51 3. This analysis should assist us in determining whether excessive debt in the sample firms was a factor in their eventual failure.

The expected-benefit equation is formed with two underlying assumptions. Recent Evidence on the Magnitude … dataset selected here prevents us from estimating BCD independently.

We examine the degree of indebtedness in year t-1 and t-2 in an effort to trace deterioration in debt ratios as firms approach insolvency. Since our primary 6 Altman [1] reports measures of BCD at 4. Yao 53 interest is to examine recent evidence on indirect bankruptcy costs, we retain only firms that went bankrupt over the years This group of firms is then examined for data availability so that a final sample with complete market and accounting data to permit analysis is retained as per the following algorithm.

First, firms were removed from the sample if they were not listed on Compustat or listed but did not have complete data. Second, since the regression methodology we employ requires at least 13 years of sales and profit data, firms that did not have sufficient data on these variables were eliminated. Finally, firms were dropped if Comupstat did not have more than three other firms within the same four-digit SIC to form a reasonable industry sales series for the regression analysis.

These data requirements resulted in a usable sample of 62 firms with complete data for analysis. A summary of the sample including firm name, bankruptcy date and industry group is contained in the Appendix.

Industries represented include: consumer products, financing, manufacturing, retail, services, technology and transportation. There are no significant disproportionate sector weightings in the sample with retail firms only slightly out-numbering firms in other industry sectors.

Table 2 presents the market values of the 62 bankrupt firms over the three years prior to filing for the petition. Given the skewness in the data, we discuss our results based on median values.

For the full sample, the median market value falls from When the full sample is segmented into the seven industry groups, the three asset- intensive sectors transportation, retail and manufacturing experience significant fall in values for all three years leading up to bankruptcy. Recent Evidence on the Magnitude … only over the years t-2 to t-1, both falling almost 40 percent.

This is not surprising, since firms in these two industry groups contain intangible assets and asset values deriving from capitalized future growth in earnings are more prone to sharp corrections when firm survival is in jeopardy.

Table 2: Firm-Value evolution in the three years preceding bankruptcy Average and median values of bankrupt firms categorised by industry groups over the last three years prior to the bankruptcy petition are presented.

The results for the full sample of 62 firms segmented into seven industry sectors: consumer product, financing, manufacturing, retail services, technology and transportation. The mean firm values with medians in parentheses are presented below each industry group and the over all average and median figures are given at the bottom. Yao 55 firm value is measured.

Section 5. The determinants of indirect bankruptcy costs are presented in Section 5. Finally, the leverage status of the bankrupt firms is determined using the trade-off of costs and benefits of debt financing see Section 3.

The median figures are slightly lower at 1. The differences between the two measures may be due 8 BCI are estimated using models 1 through 4 described in the methodology section 3. Recent Evidence on the Magnitude … to the somewhat large variation in BCI across firms and a few significant outliers. The results for the full sample of 62 firms are segmented into seven industry sectors consumer product, financing, manufacturing, retail, services, technology and transportation.

The mean IBC as a percentage of firm value with medians in parentheses are presented below each industry group and the overall average and median figures are given at the bottom. Hence the estimated models considered suitable for purposes of prediction. Yao 57 BCI are computed as a percentage of total asset value, falling firm value contributes to the size of BCI just as much as losing sales and profits. The retail sector experiences the second highest IBC in our sample. However, this surprisingly high average is induced by a few significant outliers in the sample.

The median figure reveals more reasonable estimates at This may be attributable to the large portion of tangible assets that tend to retain value better than assets whose value derives from future discretionary spending.

Together with the direct costs reported in Altman [1] , we find the total bankruptcy costs for the entire sample to be 6. This difference could be due to several reasons. For example, the variation may be attributable to difference in sample composition. Recent Evidence on the Magnitude … size is larger and more heterogeneous in terms of the range of industrial sectors represented. Because of this broad representation of industries, our results, which reveal an increasing trend in costs as bankruptcy approaches, are perhaps more representative of the wider economy.

The significantly lower BCI in year t-3 might be explained by improved efficiency in the transmission of information in recent years Morck, Yeung and Yu [11].

If a more efficient market is able to identify troubled firms at an early stage of distress and eliminates them through ways of liquidation or merger and acquisition, then we should expect the length of period for which firms incur indirect costs to be shorter. Overall, with a broad based sample of large U. Our results indicate that total bankruptcy costs, once taking into account indirect costs, are significant and large enough to be considered as the counter-balancing force to the tax shield benefits of debt as per the trade-off model.

Hence, indirect costs as a percentage of firm value at year t-1 are regressed on a number of selected variables described in Section 3. Yao 59 Table 4 contains the results of the cross-sectional analysis. Results from the univariate analysis Models suggest that all five variables are significant in explaining the cross-sectional variation in BCI.

For example, the coefficient of debt-to-asset ratio suggests almost a one- to-one association between indirect costs and leverage, i. The significance of this variable indicates that firm leverage is an important determinant of indirect costs of bankruptcy. Relative EBIT is statistically significant implying that profitability, by itself, plays a role in explaining indirect costs.

According to literature, the author has pointed out that costs of bankruptcy can be divided into different groups, e. The paper indicates the following corporate bankruptcy costs allocation criteria: time span, type of proceedings and the accounting perspective at the microeconomic level of analysis. The author has paid attention to models evaluation of costs of corporate bankruptcy.

It is worth emphasizing that measurement of indirect costs of enterprises bankruptcy is a very complex issue. Altman I. Kwansa F. Morawska S.