How much of a firm's value could be lost due to indirect financial distress costs?

Indirect financial distress costs represent the less tangible impacts that arise when a firm faces financial difficulties. These can include loss of customer confidence, disruption of operations, decreased employee morale, and damaged relationships with suppliers and creditors. Such factors can lead to significant declines in a firm's value.

The selection of the range 10-20% indicates a commonly accepted estimate among financial analysts regarding the impact of these indirect costs. This estimation reflects the understanding that while direct financial costs, such as legal fees or bankruptcy costs, can be measured more easily, the indirect costs often translate to more substantial long-term value erosion than initially perceived.

Understanding the implications of these costs is crucial for corporate finance professionals, as it underscores the importance of financial health and proactive risk management strategies to mitigate distress before it leads to a loss of value. By maintaining strong operational stability and positive stakeholder relationships, firms can reduce the likelihood and potential impact of indirect financial distress costs.