The Survival of Marginally-Distressed Firms: Evidence on the Duration of Turnaround
41 Pages Posted: 28 Dec 2003
Date Written: September 2003
In this paper, we examine firms with established profitability that suddenly experience financial distress and subsequently return to a profitable position. Our interest lies in the speed with which a firm reverses from a loss position to a position of income and we focus on the duration of time that elapses between the year of the initial loss and the year in which the firm returns to profitability. We refer to firms with established profitability that suddenly experience financial distress and subsequently return to a profitable position as being marginally-distressed. The results in our paper suggest that the likelihood as well as the speed of recovery of a distressed firm changes over time as the associated managerial responses change. We also provide empirical evidence on factors that help explain variations in the time to turnaround of marginally-distressed firms. This latter result is particularly important from the perspective of a firm manager in identifying strategies for survival. It is also important from the perspective of an investor interested in predicting the likelihood and speed of turnaround of a distressed firm. Specifically we find that large firms are able to turnaround faster than small firms possibly due to their higher resilience and greater flexibility. We also find that while capital expenditures, increases in liquidity, and increases in employees have a positive impact on the speed of recovery, increases in long-term debt and increases in selling, general, and administrative expenses impede the speed of recovery.
Keywords: Financial Distress, Survival Analysis,
JEL Classification: C41, G33, M41
Suggested Citation: Suggested Citation