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Regular version of the site

Article

Evaluation of Financial Distress Costs at Innovative Companies

Makeeva E. Y., Khugaeva M.

One of the most important factors determining a firm’s profitable growth is scientific and technological progress. In the age of high technology innovations are vitally necessary for companies to compete with one another. Global statistics show that a huge amount of investments are focused on research and development projects in different sectors of the economy such as software and programming, biotechnological products, capital goods, beverages, accessories, restaurants, retail, hotels and motels, and so on.

However, R&D expenses are characterized by high uncertainty and returns in the long run, so not every company can afford such risky investments, for example, most of small and medium enterprises (SMEs). Besides external uncontrollable factors such as crises, disasters, political instability, and armed conflicts, each firm has its own internal problems. Together this can lead to the financial distress or even failure of a firm, and each additional risky asset can increase the probability of insolvency.

Thus, the relevance of the present paper is that each company has to find the optimal tradeoff between investments in innovations and financial distress. The solution to this problem can improve a company’s efficiency and lead to its growth. And vice versa, an unsuccessful selection can result even in the default of a firm.

The purpose of the present paper is to evaluate financial distress costs at innovative companies. In order to achieve stated this aim, the following tasks will be completed in this paper:

  • A detailed literature review on financial distress cost evaluation will be provided;
  • The most appropriate models will be determined for both direct and indirect costs related to financial distress;
  • Explanatory factors will be defined for both types of insolvency;
  • The model for direct distress cost evaluation at innovative companies will be developed;
  • The model for indirect distress cost evaluation in innovative companies will be designed;
  • The results of the conducted analysis will be described;
  • Recommendations for further research studies will be given.

The subject of the investigation is financial distress costs. Our study focuses on companies that spent at least $200 million on research and development in 2015. For the further development of the topic, data was collected from Bloomberg and the financial reports of companies. The novelty of the present paper is that the model for direct and indirect cost evaluation at innovative companies was developed.