Explain How Financial Distress of a Firm Affects Its Reputation

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The Answer is In normal circumstances,firms have an incentive to maintain a good reputation to ensure their long-run profitability.However,the incentive to be short-term oriented in times of financial distress applies to investments in reputation as well as in physical assets.Under financial distress,the long-run value of a good reputation may be less important to managers than the short-run need to generate enough cash to avoid bankruptcy.For this reason,a firm may lower the quality of its products,or cut corners in other ways,to raise cash to meet its immediate debt obligations.Being close to bankruptcy can make it very difficult for some firms to carry out their business.

Explain How Financial Distress of a Firm Affects Its Reputation

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