How do banks resolve firms’ financial distress? Evidence from Japan

How do banks resolve firms’ financial distress? Evidence from Japan The main purpose of this paper is to investigate how banks resolve firms’ financial distress in Japan. Our results show that distressed firms that have more unsecured bank debt are more likely to restructure debt successfully out of court. Second, private debt restructuring is conducted during the year in which a financially distressed firm would be compelled to report negative net worth because of substantial accounting losses if no debt restructuring plans were implemented. Third, firms that are already in a negative net worth situation are more likely to receive debt forgiveness and/or debt-for-equity swaps. Finally, both the 1-year-lagged total liabilities-to-assets ratio and accounting losses are positively related to the private workout level. These results suggest that banks resolve firms’ financial distress in shareholders’ and creditors’ interests. We argue that, along with bankruptcy laws, the stock exchange rules and the fact that banks are allowed to hold shares in these firms affect the resolution of firms’ financial distress. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Quantitative Finance and Accounting Springer Journals

How do banks resolve firms’ financial distress? Evidence from Japan

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Publisher
Springer US
Copyright
Copyright © 2011 by Springer Science+Business Media, LLC
Subject
Finance; Corporate Finance; Accounting/Auditing; Econometrics; Operation Research/Decision Theory
ISSN
0924-865X
eISSN
1573-7179
D.O.I.
10.1007/s11156-011-0235-2
Publisher site
See Article on Publisher Site

Abstract

The main purpose of this paper is to investigate how banks resolve firms’ financial distress in Japan. Our results show that distressed firms that have more unsecured bank debt are more likely to restructure debt successfully out of court. Second, private debt restructuring is conducted during the year in which a financially distressed firm would be compelled to report negative net worth because of substantial accounting losses if no debt restructuring plans were implemented. Third, firms that are already in a negative net worth situation are more likely to receive debt forgiveness and/or debt-for-equity swaps. Finally, both the 1-year-lagged total liabilities-to-assets ratio and accounting losses are positively related to the private workout level. These results suggest that banks resolve firms’ financial distress in shareholders’ and creditors’ interests. We argue that, along with bankruptcy laws, the stock exchange rules and the fact that banks are allowed to hold shares in these firms affect the resolution of firms’ financial distress.

Journal

Review of Quantitative Finance and AccountingSpringer Journals

Published: Mar 25, 2011

References

  • An analysis of the underreported magnitude of the total indirect costs of financial distress
    Chen, GM; Merville, LJ
  • Bankruptcy around the world: explanation of its relative use
    Claessens, S; Klapper, LF
  • Can corporate governance save distressed firms from bankruptcy? An empirical analysis
    Fich, EM; Slezak, SL
  • Financial distress and bank restructuring of small to medium size UK companies
    Franks, JR; Sussman, O

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