Distress Without Bankruptcy: An Emerging Market Perspective
62 Pages Posted: 25 Mar 2008
China is representative of many emerging markets in that its bankruptcy law and enforcement is weak and institutional background remains under-developed. Taking advantage of the country`s regional variations in government quality and financial development, we are interested in understanding what mechanisms influence distressed firm behavior in emerging markets.
We find that institutional background matters considerably. Distressed firms facing relatively weak institutional background (i.e. state-owned firms, firms from areas with poorer government quality and/or more backward financial development) display poorer operating performance, more aggressive capital structure and investment policy, and ultimately lower recovery likelihood. The results are robust for both state-owned firms and private firms, and hold in a host of robustness tests.
Our findings provide novel evidence on how augmenting institutional factors discipline distressed firm behavior in an emerging market environment where bankruptcy law enforcement and creditor monitoring are weak.
Keywords: Distress, Bankruptcy, China, Law and Economics, Corporate Governance
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