Financial distress costs of highly levered german firms during industry downturns

Abstract

This study tests the hypotheses that businesses in financial distress see a more significant decline in revenue, invest less and cut their workforce to a greater extent compared to more conservatively financed competitors during an industry downturn. An OLS regression on multiple subsamples is utilized to evaluate the relationship between leverage and firm performance as well as corporate decision making. The results show that highly levered firms in distressed industries do not suffer from financial distress costs as they do not show significantly less sales growth. Nevertheless, financial distress decreases companies’ investment in industry distress phases while the effect on employment is ambivalent. While the findings of this study regarding the sales effect do not support the theory that financial distress is costly, it is consistent with the view that highly levered firms invest comparatively less.

Date of Award	26 Apr 2022
Original language	English
Awarding Institution	Universidade Católica Portuguesa
Supervisor	Ricardo Reis (Supervisor)