10: The importance of internal factors: results of the factor analysis--identification of important factors F1 F2 F3 B1: the cost of debt 0.212 0.950 0.096 B2: tax shield 0.049 0.758 0.232 B4: deficiency of equity 0.096 0.144 0.584 B5: business strategy 0.769 0.315 0.129 B6: risk ratio 0.696 0.424 0.256 B7: the cost of financial distress
0.414 0.202 0.588 B8: the current indebtedness of the -0.036 0.085 0.993 company B9: the impact of competition 0.771 -0.060 -0.023 B10: the decision of the parent company 0.547 0.042 0.087 Source: own Tab.
In addition, industry level analyses may help control for differences in firms' growth opportunities or asset tangibility, which may be related to the cost of financial distress. Specifically, using the Fama-French (1997) industry classifications, we divide our sample firms into 22 manufacturing industry sectors.
According to our hypothesis, higher probability and the cost of financial distress should cause positive exposures to be more positive and negative exposures to be more negative.
Even if there is the chance of escaped liability from other transactions, we intuit that the economic cost of financial distress
and social cost of insolvency are far greater than the adverse effect of escaped liability on incentives.
Thus, the social cost of financial distress is the expected payoff in case of bankruptcy.
In words, Second-Order Stochastic Dominance together with risk-aversion implies that, for any given menu, a low-risk bank has a lower cost of financial distress than a high-risk bank.
This, in turn, leads to increased leverage, a greater probability of ruin, and an increase in the expected cost of financial distress. The decline in the value of surplus is greater for the firm that sustains a higher degree of leverage.(6)
We therefore expect that (in the absence of financial distress costs) the value of the shareholder's claim on the insurer will increase with leverage.(7) However, the insurer also faces the negative and potentially significant impact on shareholder value resulting from increases in agency conflict and in the expected present value of the cost of financial distress associated with increasing leverage.
If the latter occurs, the unwanted increase in receivables can be considered a cost of financial distress. (15)
In this paper, we study the effects of financial distress on trade receivables, and estimate the cost of financial distress due to inefficiencies in the investment in trade receivables.
Overall, the results in Table @ give strong support for the view that firms use derivatives to reduce the cost of financial distress
and to increase the present value of tax losses.
Leveraged buyouts have been increasingly funded in ways which appear to reduce the risk and cost of financial distress
. Leveraged buyout financing methods include the use of specialist sponsors, strip financing, covenants which require that excess cash flows be paid to debtholders and debt provisions which allow deferral of interest payments in periods of financial distress.