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The Costs of SME ’ s Financial Distress across Europe

In the aftermath of the recent global financial crisis, our aim it is to shed light on the determinants of the financial distress costs of European small and medium enterprises (SMEs). We propose an innovative formulation of the expected costs of financial distress expressed as the product of the expected Financial Distress Likelihood times the total amount of the financial distress costs if insolvency does occur. The model is estimated using panel data methodology on samples from eight European countries (representing all European legal traditions). The results indicate that the amount of ex-post costs depend on the available collateral, the incentives of the firms' stakeholders to realize value and the institutional framework that conditions the bargaining position of different stakeholders in the resolution of financial distress. The total effect of these divergent forces can produce diverse outcomes, depending also on the average length of time taken by a SME to settle financial distress and the interaction of debt variables with the vested interests of different types of ownership.