Financial Distress, Corporate Control, and Management Turnover
44 Pages Posted: 7 Nov 2007
Date Written: October 2007
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: Suggested Citation