Financial Distress Resolution in China - Two Case Studies

Abstract

This paper examines two financially distressed companies and their restructuring strategies. The existing distress literature focuses on developed economies such as U.S. and U.K. This paper is a pioneering work in an emerging market context. The main purpose of the case studies is to provide rich in-depth evidence on complex events which large-scale empirical studies of necessity ignore. To achieve this, the paper first analyses the firms' accounting-based performance, both pre- and post-distress, to understand the nature of the firms' difficulties. It then examines the series of complex restructuring procedures each firm initiated and uses an event study approach to evaluate the stock market's reaction to these strategies. We provide an in-depth understanding of the special features of the Chinese situation, such as the role of government and other more commercially driven shareholders; the subsequent importance of social policy issues; the protracted and complex nature of the restructurings; and the frequent use of mergers, share transfers, asset swaps and asset sales. The analysis provides new hypotheses for further empirical study on a large-scale basis.

Keywords: Distress, restructuring, emerging markets, case studies

JEL Classification: P27, G34, L10, G33