A study of firm exit and survival in financial distress


The impact of financial distress on a firm’s operations traditionally presents one of the cornerstones in the literature on corporate finance and investment. For example, one of the liveliest and most persistent debates is concerned with the relevance of financial distress costs and whether they have a significant economic impact or not [e.g (1973), (1978)]. A related field of study highlights the benefits of financial distress in triggering value preserving operational change [e.g. (1989), (1990)]. Furthermore, in the empirical strand of the literature, studies have recently focused on how firms respond to distress and why they may prefer a private workout over a formal reorganization [e.g. (1993), (2006)]. One intuitive assumption implicitly endorsed by most of these studies is that sustained distress poses a threat to a firm’s very existence. Failure to respond timely and effectively, it is commonly understood, will ultimately result in the liquidation of a firm’s estate or a wholesale transfer of control to a new owner. Yet, perhaps surprisingly, the more fundamental question of what actually determines the ultimate outcome of financial distress for a given firm has remained largely unexplored


Capital Structure Equity Issue Financial Distress Ownership Concentration Market Valuation 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.


Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.

Bibliography for Chapter 6

  1. Almeida, H., and T. Philippon (2006): “The Risk-Adjusted Cost of Financial Distress,” NBER Working Paper No. 11685.Google Scholar
  2. Altman, E. E. (1968): “Financial Ratios, Discriminant Analysis, and the Prediction of Corporate Bankruptcy,” The Journal of Finance, 23, 589–609.CrossRefGoogle Scholar
  3. Andrade, G., and S. N. Kaplan (1998): “How Costly is Financial (Not Economic) Distress? Evidence from Highly Leveraged Transactions That Became Distressed,” The Journal of Finance, 53, 1443–1493.CrossRefGoogle Scholar
  4. Asquith, P., R. Gertner, and D. Scharfstein (1994): “Anatomy of Financial Distress: An Examination of Junk-Bond Issuers,” The Quarterly Journal of Economics, 109, 625–658.CrossRefGoogle Scholar
  5. Audretsoh, D. B. (1995): Innovation and Industry Evolution. MIT Press, Cambridge, MA.Google Scholar
  6. Baker, G. P., M. C. Jensen, and K. J. Murphy (1988): “Compensation and Incentives: Practice Vs. Theory,” The Journal of Finance, 43, 593–616.CrossRefGoogle Scholar
  7. Bethel, J. E., J. P. Liebeskind, and T. Opler (1998): “Block Share Purchases and Corporate Performance,” The Journal of Finance, 53, 605–634.CrossRefGoogle Scholar
  8. Botman, M., and T. Van der Goot (2004): “What Determines the Survival of Internet IPOs?,” University of Amsterdam Discussion Paper 2004/09.Google Scholar
  9. Brealey, R. A., S. C. Myers, and F. Allen (2005): Principles of Corporate Finance. McGraw Hill, Upper Saddle River, N.J.Google Scholar
  10. Brown, D. T. (1989): “Claimholder Incentive Conflicts in Reorganization: The Role of Bankruptcy Law,” The Review of Financial Studies, 2, 109–123.CrossRefGoogle Scholar
  11. Brown, D. T., C. M. James, and R. M. Mooradian (1994): “Asset Sales by Financially Distressed Firms,” Journal of Corporate Finance, 1, 233–257.CrossRefGoogle Scholar
  12. Brown, S., and J. Warner (1985): “Using Daily Stock Returns in Event Studies,” Journal of Financial Economics, 14, 3–31.CrossRefGoogle Scholar
  13. Buehler, S., C. Kaiser, and F. Jaeger (2006): “Merge or Fail? The Determinants of Mergers and Bankruptcies in Switzerland, 1995–2000,” Economics Letters, 90, 88–95.CrossRefGoogle Scholar
  14. Burkart, M., D. Gromb, and F. Panunzi (2000): “Agency Conflicts in Public and Negotiated Transfers of Corporate Control,” The Journal of Finance, 55, 647–677.CrossRefGoogle Scholar
  15. Clark, K., and E. Ofek (1994): “Mergers as a Means of Restructuring Distressed Firm: An Empirical Investigation,” Journal of Financial and Quantitative Analysis, 29, 541–565.CrossRefGoogle Scholar
  16. Cookburn, I. M., and S. Wagner (2005): “Business Method Patents: What are They Good for? Patenting and the Survival of Internet-Related IPOs,” Mimeo, Boston University and University of Munich.Google Scholar
  17. Cox, D. R. (1972): “Regression Models and Life-Tables,” Journal of the Royal Statistical Society, Series B34, 187–220.Google Scholar
  18. Demsetz, H., and K. Lehn (1985): “The Structure of Corporate Ownership: Causes and Consequences,” Journal of Political Economy, 93, 1155–1177.CrossRefGoogle Scholar
  19. Denis, D. K., and K. J. Rodgers (2006): “Chapter 11: Duration, Outcome, and Post-Reorganization Performance,” Journal of Financial and Quantitative Analysis (forthcoming), 41.Google Scholar
  20. Dewey, D. (1961): “Mergers and Cartels: Some Reservations About Policy,” American Economic Review, 52, 255–262.Google Scholar
  21. Fama, E. F., and M. C. Jensen (1983): “Separation of Ownership and Control,” Journal of Law and Economics, 26, 301–325.CrossRefGoogle Scholar
  22. Franks, J. R., and S. V. Sanzhar (2003): “How Do Firms Overcome The Debt Overhang Problem?,” Working Paper, London Business School.Google Scholar
  23. Geroski, P. A. (1995): “What Do We Know About Entry?,” International Journal of Industrial Organization, 14, 421–440.CrossRefGoogle Scholar
  24. Gilson, S. C., K. John, and L. H. Lang (1990): “Troubled Debt Restructurings, An Empirical Study of Private Reorganization of Firms in Default,” Journal of Financial Economics, 27, 315–353.CrossRefGoogle Scholar
  25. Greene, W. H. (2003): Econometric Analysis. Prentice Hall, Upper Saddle River, 5th edn.Google Scholar
  26. Grossman, S. J., and O. D. Hart (1980): “Takeover Bids, the Freerider Problem, and the Theory of the Corporation,” The Bell Journal of Economics, 11, 42–64.CrossRefGoogle Scholar
  27. Hannan, M. T., and J. H. Freeman (1989): Organizational Ecology. Harvard University Press, Cambridge, MA.Google Scholar
  28. Harhoff, D., K. Stahl, and M. Woywode (1998): “Legal Forms, Growth and Exit of West German Firms-Empirical Results for Manufactoring, Construction, Trade and Service Industries,” The Journal of Industrial Economics, 46, 453–488.CrossRefGoogle Scholar
  29. Hasbrouok, J. (1985): “The Characteristics of Takeover Targets: Q and Other Measures,” Journal of Banking and Finance, 9, 351–362.CrossRefGoogle Scholar
  30. Haugen, R., and L. Senbet (1978): “The Insignificance of Bankruptcy Costs to the Theory of Optimal Capital Structure,” The Journal of Finance, 33, 383–393.CrossRefGoogle Scholar
  31. Heiss, F., and J. Köke (2001): “Dynamics in Ownership and Firm Survival: Evidence from Corporate Germany,” ZEW Discussion Paper No. 01-63, Centre for Economic Research, Mannheim.Google Scholar
  32. Hensler, D. A., R. C. Rutherford, and T. M. Springer (1997): “The Survival of Initial Public Offerings in the Aftermarket,” Journal of Financial Research, 20, 93–110.Google Scholar
  33. Holmström, B., and J. Tirole (1993): “Market Liquidity and Performance Monitoring,” The Journal of Political Economy, 101, 678–709.CrossRefGoogle Scholar
  34. Jackson, T. (1982): “Bankruptcy, Non-Bankruptcy Entitlements, and the Creditors Bargain,” Yale Law Journal, 91, 857–907.CrossRefGoogle Scholar
  35. Jensen, M. C. (1989): “Active Investors, LBO’s and Privatization of Bankruptcy,” Journal of Applied Corporate Finance, 2, 35–44.CrossRefGoogle Scholar
  36. Jensen, M. C., and W. Meckling (1976): “Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership Structure,” Journal of Financial Economics, 3, 305–360.CrossRefGoogle Scholar
  37. Kahl, M. (2001): “Financial Distress as a Selection Mechanism: Evidence from the United States,” University of California, Los Angeles Working Paper 16/01.Google Scholar
  38. Kaplan, E., and P. Meier (1958): “Nonparametric Estimation from Incomplete Observations,” Journal of the American Statistical Association, 53, 457–481.CrossRefGoogle Scholar
  39. Köke, J. (2002): Corporate Governance in Germany: An Empirical Investigation. Physica, Heidelberg.Google Scholar
  40. Köke, J., and A. Börsoh-Supan (2002): “An Applied Econometrician’s View of Empirical Corporate Governance Studies,” German Economic Review, 3, 295–326.CrossRefGoogle Scholar
  41. Kraus, A., and R. H. Litzenberger (1973): “A State-Preference Model of Optimal Financial Leverage,” The Journal of Finance, 28, 911–922.CrossRefGoogle Scholar
  42. Maksimovic, V., and G. M. Phillips (1998): “Asset Efficiency and Reallocation Decisions of Bankrupt Firms,” The Journal of Finance, 53, 1495–1532.CrossRefGoogle Scholar
  43. -(2001): “The Market for Corporate Assets: Who Engages in Mergers and Asset Sales and are their Efficiency Gains?,” The Journal of Finance, 56, 2019–2065.CrossRefGoogle Scholar
  44. Manne, H. G. (1965): “Mergers and the Market for Corporate Control,” The Journal of Political Economy, 73, 110–120.CrossRefGoogle Scholar
  45. Mooradian, R. M. (1994): “The Effect of Bankruptcy Pretection on Investment: Chapter 11 as a Screening Device,” The Journal of Finance, 49, 1403–1430.CrossRefGoogle Scholar
  46. Mulherin, H. J., and A. L. Boone (2000): “Comparing Acquisitions and Divestitures,” Journal of Corporate Finance, 6, 117–139.CrossRefGoogle Scholar
  47. Narendranathan, W., and M. B. Stewart (1991): “Testing the Proportionality of Cause-Specific Hazards in Competing Risk Models,” Oxford Bulletin of Economics and Statistics, 53, 331–340.CrossRefGoogle Scholar
  48. Ofek, E. (1993): “Capital Structure and Firm Response to Poor Performance,” Journal of Financial Economics, 34, 3–30.CrossRefGoogle Scholar
  49. Pindado, J., and L. Rodrigues (2005): “Determinants of Financial Distress Costs,” Financial Markets and Portfolio Management, 19, 343–359.CrossRefGoogle Scholar
  50. Powell, R. G. (1997): “Modelling Takeover Likelihood,” Journal of Business Finance and Accounting, 24, 1009–1030.CrossRefGoogle Scholar
  51. Prentice, R. L. (1978): “Linear Rank Tests with Right-Censored Data,” Biometrika, 65, 167–179.CrossRefGoogle Scholar
  52. Soharfstein, D. S. (1988): “The Disciplinary Role of Takeovers,” Review of Economic Studies, 55, 185–200.CrossRefGoogle Scholar
  53. Soholes, M., and J. Williams (1977): “Estimating Betas from Nonsynchronous Data,” Journal of Financial Economics, 5, 309–327.CrossRefGoogle Scholar
  54. Schultz, P. (1993): “Unit Initial Public Offerings: A Form of Staged Financing,” Journal of Financial Economics, 59, 199–229.CrossRefGoogle Scholar
  55. Shleifer, A., and R. W. Vishny (1986): “Large Shareholders and Corporate Control,” Journal of Political Economy, 94, 461–488.CrossRefGoogle Scholar
  56. -(1992): “Liquidation Values and Debt Capacity: A Market Equilibrium Approach,” The Journal of Finance, 47, 1343–1366.CrossRefGoogle Scholar
  57. Shumway, T. (2001): “Forecasting Bankruptcy More Accurately: A Simple Hazard Model,” The Journal of Business, 74, 101–124.CrossRefGoogle Scholar
  58. White, H. (1982): “Maximum Likelihood Estimation of Misspecified Models,” Econometrica, 50, 1–24.CrossRefGoogle Scholar
  59. Wruck, K. H. (1990): “Financial Distress, Reorganization, and Organizational Efficiency,” Journal of Financial Economics, 27, 419–444.CrossRefGoogle Scholar

Copyright information

© Deutscher Universitäts-Verlag | GWV Fachverlage GmbH, Wiesbaden 2007

Personalised recommendations