Research output: Contribution to Journal/Magazine › Journal article › peer-review
Research output: Contribution to Journal/Magazine › Journal article › peer-review
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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 -