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Can investors restrict managerial behavior in distressed firms?

Pryshchepa, Oksana ORCID:, Aretz, Kevin and Banerjee, Shantanu 2013. Can investors restrict managerial behavior in distressed firms? Journal of Corporate Finance 23 , pp. 222-239. 10.1016/j.jcorpfin.2013.08.006

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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.

Item Type: Article
Date Type: Publication
Status: Published
Schools: Business (Including Economics)
Publisher: Elsevier
ISSN: 0929-1199
Date of First Compliant Deposit: 13 December 2019
Date of Acceptance: 13 August 2013
Last Modified: 07 Nov 2023 04:25

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