Financial distress and bankruptcy - Pehn Franz
Companies can run into financial distress caused by
different reasons. Either internal or external
influences can drive a company into a strategic, an
earnings crisis or even worse into bankruptcy.
Company crisis can threaten the existence of a
company or crisis can have the potential to destroy
a company.
The literature knows four generic terms, sometimes
used interchangeable, for financial distress:
bankrupt, default, failed and insolvent.
As soon as a company is facing financial distress,
financial distress costs arise. These costs can be
separated into direct bankruptcy costs and indirect
bankruptcy costs. Direct bankruptcy costs are clear
and easy to measure, indirect bankruptcy costs are
subject to estimations and calculations based on
statistical information and benchmarks. The sum of
the potential bankruptcy costs influences also the
optimal capital structure of the company.
There are four dimensions for financial
restructuring to focus on - Asset restructuring,
restructuring of the ownership structure, change the
corporate leverage or restructure the companies
equity.
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