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Can investors restrict managerial behavior in distressed firms?

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Can investors restrict managerial behavior in distressed firms? / Pryshchepa, Oksana; Aretz, Kevin; Banerjee, Shantanu.

In: Journal of Corporate Finance, Vol. 23, 12.2013, p. 222-239.

Research output: Contribution to journalJournal article

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Pryshchepa, Oksana ; Aretz, Kevin ; Banerjee, Shantanu. / Can investors restrict managerial behavior in distressed firms?. In: Journal of Corporate Finance. 2013 ; Vol. 23. pp. 222-239.

Bibtex

@article{b42185b10a0e47f391f252c1f14a6da3,
title = "Can investors restrict managerial behavior in distressed firms?",
abstract = "In this article, we show that only distressed firms not identified as distressed by creditors are able to transfer wealth from creditors to shareholders. Using the number of years to future bankruptcy as a proxy for genuine distress and measures based on observable firm characteristics as proxies for perceived distress, genuinely distressed firms incorrectly perceived as healthy cut payouts to shareholders more slowly and invest more aggressively as uncertainty increases than correctly identified distressed firms. Consistent with the idea that incorrectly identified distressed firms actively hide their troubles, we show that they tend to follow more aggressive accounting policies and often resort to earnings misstatements. We also show that they are often not restricted by covenants and can borrow further debt capital at affordable rates, suggesting that a lack of monitoring by creditors allows them to transfer wealth to shareholders.",
keywords = "Agency conflicts, Financial distress, Firm investment, Expected volatility",
author = "Oksana Pryshchepa and Kevin Aretz and Shantanu Banerjee",
year = "2013",
month = dec
doi = "10.1016/j.jcorpfin.2013.08.006",
language = "English",
volume = "23",
pages = "222--239",
journal = "Journal of Corporate Finance",
issn = "0929-1199",
publisher = "Elsevier",

}

RIS

TY - JOUR

T1 - Can investors restrict managerial behavior in distressed firms?

AU - Pryshchepa, Oksana

AU - Aretz, Kevin

AU - Banerjee, Shantanu

PY - 2013/12

Y1 - 2013/12

N2 - In this article, we show that only distressed firms not identified as distressed by creditors are able to transfer wealth from creditors to shareholders. Using the number of years to future bankruptcy as a proxy for genuine distress and measures based on observable firm characteristics as proxies for perceived distress, genuinely distressed firms incorrectly perceived as healthy cut payouts to shareholders more slowly and invest more aggressively as uncertainty increases than correctly identified distressed firms. Consistent with the idea that incorrectly identified distressed firms actively hide their troubles, we show that they tend to follow more aggressive accounting policies and often resort to earnings misstatements. We also show that they are often not restricted by covenants and can borrow further debt capital at affordable rates, suggesting that a lack of monitoring by creditors allows them to transfer wealth to shareholders.

AB - In this article, we show that only distressed firms not identified as distressed by creditors are able to transfer wealth from creditors to shareholders. Using the number of years to future bankruptcy as a proxy for genuine distress and measures based on observable firm characteristics as proxies for perceived distress, genuinely distressed firms incorrectly perceived as healthy cut payouts to shareholders more slowly and invest more aggressively as uncertainty increases than correctly identified distressed firms. Consistent with the idea that incorrectly identified distressed firms actively hide their troubles, we show that they tend to follow more aggressive accounting policies and often resort to earnings misstatements. We also show that they are often not restricted by covenants and can borrow further debt capital at affordable rates, suggesting that a lack of monitoring by creditors allows them to transfer wealth to shareholders.

KW - Agency conflicts

KW - Financial distress

KW - Firm investment

KW - Expected volatility

U2 - 10.1016/j.jcorpfin.2013.08.006

DO - 10.1016/j.jcorpfin.2013.08.006

M3 - Journal article

VL - 23

SP - 222

EP - 239

JO - Journal of Corporate Finance

JF - Journal of Corporate Finance

SN - 0929-1199

ER -