Resolution of Corporate Distress: Evidence from East Asia's Financial Crisis

33 Pages Posted: 21 Sep 1999

See all articles by Stijn Claessens

Stijn Claessens

Bank for International Settlements (BIS)

Simeon Djankov

London School of Economics & Political Science (LSE); Peter G. Peterson Institute for International Economics

Leora F. Klapper

World Bank; World Bank - Development Research Group (DECRG)

Date Written: June 1999

Abstract

Evidence from East Asia suggests that a firm's ownership relationship with a family or bank provides insurance against the likelihood of bankruptcy during bad times, possibly at the expense of minority shareholders. Bankruptcy is more likely in countries with strong creditor rights and a good judicial system - perhaps because creditors are more likely to force a firm to file for bankruptcy. The widespread financial crisis in East Asia caused large economic shocks, which varied by degree across the region. That crisis provides a unique opportunity for investigating the factors that determine the use of bankruptcy processes in a number of economies.

Claessens, Djankov, and Klapper study the use of bankruptcy in Hong Kong, Indonesia, Japan, the Republic of Korea, Malaysia, the Philippines, Singapore, Taiwan (China), and Thailand. These economies differ in their institutional frameworks for resolving financial distress, partly because of the different origins of their judicial systems. One difference is the strength of creditor rights, which Claessens, Djankov, and Klapper document. They expect that differences in legal enforcement and judicial efficiency should affect the resolution of financial distress. Using a sample of 4,569 publicly traded East Asian firms, they observe a total of 106 bankruptcies in 1997 and 1998. They find that: · The likelihood of filing for bankruptcy is lower for firms with ownership links to banks and families, controlling for firm and country characteristics.

Filings are more likely in countries with better judicial systems.

Filings are more likely where there are both strong creditor rights and a good judicial system.

These results alone do not allow Claessens, Djankov, and Klapper to address whether increased use of bankruptcy is an efficient resolution mechanism.

This paper - a product of the Financial Economics Unit, Financial Sector Practice Department - is part of a larger effort in the department to study corporate financing and governance mechanisms in emerging markets.

JEL Classification: G33, G34

Suggested Citation

Claessens, Stijn and Djankov, Simeon and Klapper, Leora F., Resolution of Corporate Distress: Evidence from East Asia's Financial Crisis (June 1999). World Bank Policy Research Working Paper No. 2133. Available at SSRN: https://ssrn.com/abstract=168530

Stijn Claessens

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

Simeon Djankov (Contact Author)

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

Peter G. Peterson Institute for International Economics ( email )

1750 Massachusetts Avenue, NW
Washington, DC 20036
United States

Leora F. Klapper

World Bank ( email )

1818 H Street, N.W.
Washington, DC 20433
United States
202-473-8738 (Phone)

HOME PAGE: http://econ.worldbank.org/staff/lklapper

World Bank - Development Research Group (DECRG)

1818 H. Street, N.W.
MSN3-311
Washington, DC 20433
United States

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