More firms enter financial distress as a result of poor management than as a result of economic distress. Management actions are a significant determinant of recovery and improvement in the industry-adjusted market value for firms entering financial distress as a result of poor management, but not for firms entering as a result of economic distress. In the early stages of financial distress, median firm operating income measured on an unadjusted basis and after controlling for other factors which alter firm performance increases significantly. The results support Jensen’s hypothesis that financial distress triggers corrective action which improves firm performance. (JEL G300)
This is a preview of subscription content, access via your institution.
Buy single article
Instant access to the full article PDF.
Price excludes VAT (USA)
Tax calculation will be finalised during checkout.
Altman, Edward I. 1984. “A Further Empirical Investigation of the Bankruptcy Cost Question.”Journal of Finance 39: 1067–1089.
Asquith, Paul, Robert Gertner, and David Scharfstein. 1994. “Anatomy of Financial Distress: An Examination of Junk Bond Issuers.”Quarterly Journal of Economics 109: 625–658.
Brown, David T., Christopher M. James, and Robert M. Mooradian. 1992. “The Information Content of Distressed Restructurings Involving Public and Private Debt Claims.”Journal of Financial Economics 33: 93–118.
Clark, Truman A., and Mark I. Weinstein. 1983. “The Behavior of Common Stock of Bankrupt Firms.”Journal of Finance 38: 489–504.
Gilson, Stuart C., Kose John, and Larry H. P. Lang. 1990. “Troubled Debt Restructurings: An Empirical Study of Private Reorganization of Firms in Default.”Journal of Financial Economics 27: 315–353.
Harris, Milton, and Artur Raviv. 1990. “Capital Structure and Informational Role of Debt.”Journal of Finance 45: 321–350.
Jensen, Michael C. 1989. “The Eclipse of the Public Corporation.”Harvard Business Review 5: 61–74.
Jensen, Michael C., and William H. Meckling. 1976. “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure.”Journal of Financial Economics 3: 305–360.
John, Kose, Larry H. D. Lang, and Jeffry Netter. 1992. “The Voluntary Restructuring of Large Firms in Response to Performance Decline.”Journal of Finance 47: 891–917.
Ofek, Eli. 1993. “Capital Structure and Firm Response to Poor Performance.”Journal of Financial Economics 34: 3–30.
Opler, Tim C., and Sheridan Titman. “Financial Distress and Corporate Performance.”Journal of Finance 49: 1015–1040.
Warner, Jerold B. 1977. “Bankruptcy Costs: Some Evidence.”Journal of Finance 32: 337–347.
Wruck, Karen H. 1990. “Financial Distress, Reorganization, and Organizational Efficiency.”Journal of Financial Economics 27: 419–444.
This paper is based on my dissertation at the University of Houston. I appreciate the helpful comments from Ronald F. Singer (chair), David W. Blackwell, Raul Susmel, and Julio Peixoto, and seminar participants at the Southern Finance Association meeting.
Rights and permissions
About this article
Cite this article
Whitaker, R.B. The early stages of financial distress. J Econ Finan 23, 123–132 (1999). https://doi.org/10.1007/BF02745946
- Cash Flow
- Firm Performance
- Financial Distress
- Poor Management
- Logit Regression