How do banks resolve firms’ financial distress Ev

Authors: Naohisa Goto Konari Uchida

Publish Date: 2011/03/25

Volume: 38, Issue: 4, Pages: 455-478

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Abstract

The main purpose of this paper is to investigate how banks resolve firms’ financial distress in Japan Our results show that distressed firms that have more unsecured bank debt are more likely to restructure debt successfully out of court Second private debt restructuring is conducted during the year in which a financially distressed firm would be compelled to report negative net worth because of substantial accounting losses if no debt restructuring plans were implemented Third firms that are already in a negative net worth situation are more likely to receive debt forgiveness and/or debtforequity swaps Finally both the 1yearlagged total liabilitiestoassets ratio and accounting losses are positively related to the private workout level These results suggest that banks resolve firms’ financial distress in shareholders’ and creditors’ interests We argue that along with bankruptcy laws the stock exchange rules and the fact that banks are allowed to hold shares in these firms affect the resolution of firms’ financial distressEarlier versions of this paper were presented at the Global Conference on Business and Finance Southwestern Finance Association Nippon Finance Association Japanese Association of Applied Economics and finance seminars held at Hitotsubashi University Kyushu University Nanzan University and Seinan Gakuin University We thank Marc Bremer Kotaro Inoue Joseph P Ogden Peng Xu and Noriyuki Yanagawa for their helpful comments and advice This research is supported financially by the JSPS GrantinAid for Scientific Research and the Zengin Foundation

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