Financial Distress, Corporate Control, and Management Turnover

44 Pages Posted: 7 Nov 2007

See all articles by Philipp Jostarndt

Philipp Jostarndt

Ludwig Maximilian University of Munich (LMU) - Faculty of Business Administration (Munich School of Management)

Zacharias Sautner

Frankfurt School of Finance & Management; European Corporate Governance Institute (ECGI)

Date Written: October 2007

Abstract

We empirically investigate the effect of financial distress on corporate ownership and control. Our analysis is based on a panel of 267 German firms that suffered from repeated interest coverage shortfalls between 1996 and 2004. We track each firm's development over the distress cycle with particular attention on corporate ownership, restructuring, and management turnover. We find a significant decrease in ownership concentration. Private investors gradually relinquish their dominating role and thereby cease to be an effective source of managerial control. By contrast, ownership representation by banks and outside investors almost doubles. Shareholdings by executive and non-executive directors also substantially increase but have no effect on managerial tenure. Forced management turnover is mostly initiated by outside investors and banks and often occurs subsequent to debt restructurings, block investments, and takeovers.

Keywords: Corporate control, financial distress, restructuring

JEL Classification: G32, G33

Suggested Citation

Jostarndt, Philipp and Sautner, Zacharias, Financial Distress, Corporate Control, and Management Turnover (October 2007). Available at SSRN: https://ssrn.com/abstract=1028216 or http://dx.doi.org/10.2139/ssrn.1028216

Philipp Jostarndt

Ludwig Maximilian University of Munich (LMU) - Faculty of Business Administration (Munich School of Management) ( email )

Kaulbachstr. 45
Munich, DE 80539
Germany

Zacharias Sautner (Contact Author)

Frankfurt School of Finance & Management ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

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