The influence of managerial incentives on the resolution of financial distress

Dong-Kyoon Kim, Chuck C.Y. Kwok

Research output: Contribution to journalArticleResearchpeer-review

2 Citations (Scopus)

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 languageEnglish
Pages (from-to)61-83
Number of pages23
JournalReview of Quantitative Finance and Accounting
Volume32
Issue number1
DOIs
StatePublished - 1 Jan 2009

Fingerprint

Managerial incentives
Financial distress
Chapter 11
Distress
Renegotiation
Economics
Empirical test
Private firms
Managerial ownership
Prediction model
Ownership structure

Keywords

  • Financial distress resolution
  • Managerial incentives

Cite this

@article{6eef6308128d457d8240ca8fbbdf076f,
title = "The influence of managerial incentives on the resolution of financial distress",
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.",
keywords = "Financial distress resolution, Managerial incentives",
author = "Dong-Kyoon Kim and Kwok, {Chuck C.Y.}",
year = "2009",
month = "1",
day = "1",
doi = "10.1007/s11156-008-0085-8",
language = "English",
volume = "32",
pages = "61--83",
journal = "Review of Quantitative Finance and Accounting",
issn = "0924-865X",
publisher = "Springer New York",
number = "1",

}

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 journalArticleResearchpeer-review

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

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 -