Professor Coordenador
Escola Superior de Tecnologia
de Viseu - IPV
Working Paper
Working Papers

Kevin Keasey, Júlio Pindado, Luís Rodrigues
Título do artigo: "The Costs of SME’s Financial Distress across Europe"


In the midst of a global financial crisis our aim it is to shed light on the determinants of the financial distress costs, particularly on Small and Medium firms (SMEs) belonging to the European Union manufacturing sector. We propose an innovative formulation of the expected costs of financial distress expressed as the expected Financial Distress Likelihood multiplied by the magnitude of the financial distress costs borne by a firm, if insolvency does occur. These ex-post costs are the result of the joint effect of the available collateral, the incentives of the firms' stakeholders to realize value and the institutional framework. The model is estimated for samples of SMEs from eight European countries, representative of all European legal traditions, using the Generalized Method of Moments. The empirical results obtained allows us to verify that the ex ante costs of financial distress are positively related with Financial Distress Likelihood and he deviation of long term leverage relative to the median of the respective sector. On the contrary, the short term debt, and the proportion of fixed assets, that can be sold or used as collateral, are relevant sources of financial restructuring thereby reducing ex post financial distress costs. Finally, the interaction of debt variables with the vested interest of different types of management and ownership, allow for non-monotonic effect of the bargaining position of different stakeholders in the resolution of financial distress.



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