Can Creditors Restrict Managerial Investment Behavior in Distressed Firms?

43 Pages Posted: 22 Aug 2012 Last revised: 1 Dec 2012

See all articles by Oksana Pryshchepa

Oksana Pryshchepa

Cardiff University Business School; Lancaster University - Department of Accounting and Finance

Kevin Aretz

Alliance Manchester Business School

Shantanu Banerjee

Lancaster University - Management School

Date Written: November 30, 2012

Abstract

Shareholders in distressed firms should profit from shifting to more risky assets, but there is little empirical evidence documenting such behavior. We find that this weak evidence is consistent with creditors being somewhat able to control the investment policies of distressed firms if distress is detected in a timely fashion. We use the number of years to future bankruptcy as a proxy for true distress, and various measures based on current financial statements and stock market data to proxy for perceived distress, and we show that only firms that manage to conceal their health issues risk-shift. Further evidence indicates that creditors have control over the investment behavior of known distressed firms through both covenant restrictions and these firms' continuous financing needs. International data further support our conclusions.

Keywords: Risk-shifting, firm investment, expected volatility

JEL Classification: G32, G33

Suggested Citation

Pryshchepa, Oksana and Aretz, Kevin and Banerjee, Shantanu, Can Creditors Restrict Managerial Investment Behavior in Distressed Firms? (November 30, 2012). Available at SSRN: https://ssrn.com/abstract=2133504 or http://dx.doi.org/10.2139/ssrn.2133504

Oksana Pryshchepa (Contact Author)

Cardiff University Business School ( email )

Cardiff CF10 3EU
United Kingdom

HOME PAGE: http://https://www.cardiff.ac.uk/people/view/1700999-pryshchepa-oksana

Lancaster University - Department of Accounting and Finance ( email )

Lancaster, Lancashire LA1 4YX
United Kingdom

Kevin Aretz

Alliance Manchester Business School ( email )

Crawford House
Oxford Road
Manchester M13 9PL, Lancashire
United Kingdom
+44(0) 161 275 6368 (Phone)
+44(0) 161 275 4023 (Fax)

HOME PAGE: http://www.kevin-aretz.com

Shantanu Banerjee

Lancaster University - Management School ( email )

Lancaster, Lancashire LA1 4YX
United Kingdom

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