SAP in $500 million lawsuit
John Sterlicchi · Computer Fraud & Security · 1998
Bankruptcy-related costs may be categorized into four areas: (1) Real costs borne by the distressed firm; (2) Real costs borne directly by the claimants; (3) Losses to the distressed firm that are offset by gains to other entities; (4) Real costs borne by parties other than the distressed firm or its claimants. Cost categories 1, 2, and 3 are relevant for claimants, while Categories 1, 2, and 4 are relevant for society. Focusing on the first three categories, the present study reaches the following conclusions: First, after allowing for their costs of collections, claimsholders recover approximately 56% of the bankrupt firm's predistress value (PDV). Second, dealing with financial distress generally consumes between 12% and 20% of the distressed firm's PDV. Taking the midpoint of this range (16%) implies that the losses that lead to the firm's distress average approximately 28% of its PDV. These estimated values demonstrate the importance of bankruptcy costs in determining an optimal capital structure and explaining the level of risk premiums. Because of its impact on risk premiums, the cost of capital and needed tax rates, the cost of dealing with financial distress has an adverse impact on resource allocations throughout the economy.