distressedfirmsmaycontinueto havevaluebecauseofthe
limitedliabilityfeatureandoptioncharacteristicsofpublicly
traded equity.
POSSIBILITY AND CONSEQUENCES OF FINANCIAL
DISTRESS
Growthisnotinevitable,andfirmsmaynotremainasgoing
concerns.Infact,evenlargepubliclytradedfirmssometimes
become distressed for one reason or another and the
consequences forvalue canbe serious.In this section, we
consider first how common it is for firms to become
distressedandfollow upbylookingattheconsequencesof
distress.
Possibility of Distress
Financialdistressisfarmorecommonintherealworldthat
most ofus assumeit to be.In fact, evencasualempirical
observation suggests that a very large number of firms,
especiallysmaller andhigher-growthones,willnotsurvive
and willgo out of business. Some will fail because they
borrowmoneytofundtheiroperationsandthenareunableto
makethesedebtpayments.Otherwillfailbecausetheydonot
have the cash to cover their operating needs.
Togetameasureattheprobabilityofdistress,we haveto
beginbydefiningdistress.Ifwedefineitascompaniesthat
enterChapter11,relativelyfewpubliclytradedfirmsatany
pointin time canbe considereddistressed. If wedefine it
morebroadlyasfirmsthatarehavingtroublemakinginterest
payments and meeting other contractual commitments,
distress ismuch morecommon. Kahl (2001)examined all