Subject. This article considers the theoretical and methodological features of managing insolvency costs within the framework of the trade-off theory of capital structure. Objectives. The article aims to improve capital structure management policy by balancing the tax shield and bankruptcy costs, which ensures an increase in the company's value and maintains its financial stability. Methods. For the study, I used the methods of analysis and synthesis, visualization and generalization, expert assessments, and interpretation. Results. The article reveals the nature of insolvency costs through their classification into explicit and implicit ones, and formulates the limitations associated with their quantitative assessment, which is necessary for managerial decision-making. The article finds that insolvency costs arise from the moment financial instability risks appear, and their classification, taking into account the likelihood of bankruptcy, can help determine the point at which insolvency costs increase significantly and enable timely action. The management of capital structure and the level of insolvency costs should be carried out in accordance with the stage of the economic entity's life cycle. Conclusions. The presence of bankruptcy costs is inevitable, but effective management of their level, largely determined by the professional competencies of the responsible employees, can mitigate the negative consequences. Cost of insolvency optimization must be carried out in accordance with the determinants that define the capital structure and the factors of the internal and external environment. Achieving the target level of failure costs contributes not only to increasing the company's value but also to improving the economic climate by reducing the likelihood of bankruptcies.
Keywords: bankruptcy costs, capital structure, company value, trade-off theory, tax shield
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