Distress Without Bankruptcy: An Emerging Market Perspective

62 Pages Posted: 25 Mar 2008

See all articles by Joseph P. H. Fan

Joseph P. H. Fan

The Chinese University of Hong Kong (CUHK) - School of Accountancy

Jun Huang

Shanghai University of Finance and Economics

Ning Zhu

China Academy of Financial Research (CAFR); Yale School of Management; University of California, Davis - Graduate School of Management

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Abstract

China is representative of many emerging markets in that its bankruptcy law and enforcement is weak and institutional background remains under-developed. Taking advantage of the country`s regional variations in government quality and financial development, we are interested in understanding what mechanisms influence distressed firm behavior in emerging markets.

We find that institutional background matters considerably. Distressed firms facing relatively weak institutional background (i.e. state-owned firms, firms from areas with poorer government quality and/or more backward financial development) display poorer operating performance, more aggressive capital structure and investment policy, and ultimately lower recovery likelihood. The results are robust for both state-owned firms and private firms, and hold in a host of robustness tests.

Our findings provide novel evidence on how augmenting institutional factors discipline distressed firm behavior in an emerging market environment where bankruptcy law enforcement and creditor monitoring are weak.

Keywords: Distress, Bankruptcy, China, Law and Economics, Corporate Governance

Suggested Citation

Fan, Po Hung Joseph P. H. and Huang, Jun and Zhu, Ning, Distress Without Bankruptcy: An Emerging Market Perspective. Available at SSRN: https://ssrn.com/abstract=1102859 or http://dx.doi.org/10.2139/ssrn.1102859

Po Hung Joseph P. H. Fan

The Chinese University of Hong Kong (CUHK) - School of Accountancy ( email )

Shatin, N.T.
Hong Kong
(852) 26097839 (Phone)
(852) 26035114 (Fax)

Jun Huang

Shanghai University of Finance and Economics ( email )

777 Guoding Road
Shanghai, AK Shanghai 200433
China

Ning Zhu (Contact Author)

China Academy of Financial Research (CAFR)

1954 Huashan Road
Shanghai P.R.China, 200030
China

Yale School of Management ( email )

135 Prospect Street
Box 208200
New Haven, CT 06520-8200
United States

HOME PAGE: http://pantheon.yale.edu/~nz26/

University of California, Davis - Graduate School of Management ( email )

One Shields Avenue
Davis, CA 95616
United States
530-752-3871 (Phone)
530-752-2924 (Fax)

HOME PAGE: http://www.gsm.ucdavis.edu/Faculty/Zhu/

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