Financial Distress: Public vs. Private Firms

Recent evidence suggests that private firms in the United Kingdom rely heavily on debt financing, have leverage ratios significantly higher than their public counterparts, and their access to external sources of capital remains limited. We extend these findings by examining the implications of such differences in capital structure on financial distress and its repercussions on future operating performance. In spite the higher levels of leverage among private firms, we find a higher incidence of financial distress among public firms; while financial distress, however, among such firms is predominantly due to their sluggish operating performance, the main cause of distress among for private firms is their high level of leverage. We also find that while both public and private firms maintain very similar levels of sales growth in industry adjusted terms, the profitability of the former group is markedly lower in comparison to private firms, during the time period immediately following the appearance of financial distress.