The risk-adjusted costs of financial distress: a comment

Martin Lally

Applied Economics Letters, 2010, vol. 17, issue 16, 1611-1613

Abstract: Almeida and Philippon (2007) argue that the present value of the costs of financial distress is considerably larger than previously estimated through failure to recognize that the relevant probabilities to use in this assessment are the risk-adjusted probabilities rather than the historical probabilities. However, Almeida and Philippon have still underestimated the present value of the costs of financial distress through failure to recognize that the costs are expected to grow over time, and correction for this more than doubles their present value. Accordingly, the present value of the tax benefits of debt net of the financial distress costs is now clearly negative rather than marginally positive.

Date: 2010
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DOI: 10.1080/13504850903085027

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