Publications
Publications
- 2012
- Journal of Financial Economics
The Cost and Timing of Financial Distress
By: Christopher Parsons
Abstract
Assessments of the trade-off theory have typically compared the present value of tax benefits to the present value of bankruptcy costs. We verify that this comparison overwhelmingly favors tax benefits, suggesting that firms are under-leveraged. However, when we allow firms to experience even modest (e.g., 1–2% annualized) financial distress costs prior to bankruptcy, the cumulative present value of such costs can easily offset the tax benefits.
Keywords
Citation
Parsons, Christopher. "The Cost and Timing of Financial Distress." Journal of Financial Economics 105, no. 1 (July 2012): 62–81.