Unformatted text preview: ive costs of the bankruptcy procedure such as
• Legal expenses (lawyers and court fees)
• Advisory fees
Indirect bankruptcy costs are associated with how the business changes as the firm enters the
bankruptcy procedure. Examples of indirect bankruptcy costs are:
• • Debt overhang as a bankruptcy procedure might force the firm to pass up valuable investment
projects due to limited access to external financing.
Scaring off costumers. A prominent example of how bankruptcy can scare off customers is
the Enron scandal. Part of Enron's business was to sell gas futures (i.e. a contract that for a
payment today promises to deliver gas next year). However, who wants to buy a gas future
from a company that might not be around tomorrow? Consequently, all of Enron's futures
business disappeared immediately when Enron went bankrupt.
Agency costs of financial distress as managers might be tempted to take excessive risk to
recover from bankruptcy. Moreover, there is a general agency problem bet...
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