Abstract
This study investigates the influence of managerial incentives on the resolution of financial distress. Our model predicts that when creditors and equityholders prefer different resolution methods, the likelihood of choosing Chapter 11 over private renegotiation is related to the ownership structure of the distressed firm. Empirical test results using a sample of 81 voluntary Chapter 11 firms and 65 private workout firms support the model's prediction. We show that managerial ownership is positively related to the incidence of Chapter 11 filing when there is conflict between equityholders and creditors over the choice between Chapter 11 and a private renegotiation. Consistent with prior literature, we also find that the choice of resolution methods depends on the extent of creditor holdout problems and the level of economic distress. We also performed the analysis of a subsequent 5 years of post-distress performance for all sample firms. The majorities of firms that file for Chapter 11 lose their independence and are either acquired or liquidated. However, more than half of firms in private workouts survived as independent firms.
| Original language | English |
|---|---|
| Pages (from-to) | 61-83 |
| Number of pages | 23 |
| Journal | Review of Quantitative Finance and Accounting |
| Volume | 32 |
| Issue number | 1 |
| DOIs | |
| State | Published - 1 Jan 2009 |
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Keywords
- Financial distress resolution
- Managerial incentives
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The influence of managerial incentives on the resolution of financial distress. / Kim, Dong-Kyoon; Kwok, Chuck C.Y.
In: Review of Quantitative Finance and Accounting, Vol. 32, No. 1, 01.01.2009, p. 61-83.Research output: Contribution to journal › Article
TY - JOUR
T1 - The influence of managerial incentives on the resolution of financial distress
AU - Kim, Dong-Kyoon
AU - Kwok, Chuck C.Y.
PY - 2009/1/1
Y1 - 2009/1/1
N2 - This study investigates the influence of managerial incentives on the resolution of financial distress. Our model predicts that when creditors and equityholders prefer different resolution methods, the likelihood of choosing Chapter 11 over private renegotiation is related to the ownership structure of the distressed firm. Empirical test results using a sample of 81 voluntary Chapter 11 firms and 65 private workout firms support the model's prediction. We show that managerial ownership is positively related to the incidence of Chapter 11 filing when there is conflict between equityholders and creditors over the choice between Chapter 11 and a private renegotiation. Consistent with prior literature, we also find that the choice of resolution methods depends on the extent of creditor holdout problems and the level of economic distress. We also performed the analysis of a subsequent 5 years of post-distress performance for all sample firms. The majorities of firms that file for Chapter 11 lose their independence and are either acquired or liquidated. However, more than half of firms in private workouts survived as independent firms.
AB - This study investigates the influence of managerial incentives on the resolution of financial distress. Our model predicts that when creditors and equityholders prefer different resolution methods, the likelihood of choosing Chapter 11 over private renegotiation is related to the ownership structure of the distressed firm. Empirical test results using a sample of 81 voluntary Chapter 11 firms and 65 private workout firms support the model's prediction. We show that managerial ownership is positively related to the incidence of Chapter 11 filing when there is conflict between equityholders and creditors over the choice between Chapter 11 and a private renegotiation. Consistent with prior literature, we also find that the choice of resolution methods depends on the extent of creditor holdout problems and the level of economic distress. We also performed the analysis of a subsequent 5 years of post-distress performance for all sample firms. The majorities of firms that file for Chapter 11 lose their independence and are either acquired or liquidated. However, more than half of firms in private workouts survived as independent firms.
KW - Financial distress resolution
KW - Managerial incentives
UR - http://www.scopus.com/inward/record.url?scp=58649114094&partnerID=8YFLogxK
U2 - 10.1007/s11156-008-0085-8
DO - 10.1007/s11156-008-0085-8
M3 - Article
AN - SCOPUS:58649114094
VL - 32
SP - 61
EP - 83
JO - Review of Quantitative Finance and Accounting
JF - Review of Quantitative Finance and Accounting
SN - 0924-865X
IS - 1
ER -