Financial distress cost

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Financial distress cost is the cost that incurred when a leveraged firm facing a decline in earnings is forced to take actions to avoid bankruptcy. These costs may be the result of delays in the liquidation of assets, legal fees, the effects on product quality from cutting costs, and evasive actions by suppliers and customers.


Definitions

According to Financial Management Theory and Practice by Eugene F. Brigham and Michael C. Ehrhardt (13th edition),

Financial distress costs. Incurred when a leveraged firm facing a decline in earnings is forced to take actions to avoid bankruptcy. These costs may be the result of delays in the liquidation of assets, legal fees, the effects on product quality from cutting costs, and evasive actions by suppliers and customers.

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