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The early stages of financial distress

Journal of Economics and Finance volume 23, pages 123–132 (1999)Cite this article

Abstract

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)

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Authors and Affiliations

  1. Department of Finance, Lumpkin College of Business, Eastern Illinois University, 61920, Charleston, Illinois

    Richard B. Whitaker

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  1. Richard B. Whitaker
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Additional information

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.

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Whitaker, R.B. The early stages of financial distress. J Econ Finan 23, 123–132 (1999). https://doi.org/10.1007/BF02745946

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  • DOI: https://doi.org/10.1007/BF02745946

Keywords

  • Cash Flow
  • Firm Performance
  • Financial Distress
  • Poor Management
  • Logit Regression