Financial Distress as a Selection Mechanism: Evidence from the United States

Abstract

Abstract:This paper follows the process of financial distress from its onset to its resolution for a sample of 95 firms. Only about one-third of the firms survive as independent companies. A firm's short-run and long-run survival probability is positively affected by its operating performance, but its size, leverage, and debt structure complexity have no effect on its survival chances. The post-distress operating performance of the surviving firms is very close to the industry median.

The influence of managerial incentives on the resolution of financial distress

“…Firms that file for Chapter 11 have relatively higher chance of being acquired or liquidated than private workout firms. This result is consistent with Kahl (2002). 1 Several previous studies, such as Bebcchuck and Chang (1992) and Berovitch and Israel (1998), analyze the bankruptcy decision and debt contract renegotiation of distressed firms by focusing on the conflict of interest between owner/manager and creditors.…”

“…Consequently, we have a final sample which consists of 81 Chapter 11 firms and 65 private workout firms (Total 146 firms). Our sample is quite comparable to the sample of similar studies, such as Kahl (2002). 15 Sample selection process is summarized in described in Table 1.…”

“…In effect, our sample period covers the years of 1997-2003. Studies such as Kahl (2002) and Turetsky and McEwen (2002) analyze post-performance of distressed firms.…”

“…A necessary condition for firms that remain independent is that the firm is not in Chapter 11, is not in default, and not negotiating to restructure its debt to avoid a default, at least for 5 years after the onset of financial distress.15 We compare the sample of our paper withKahl (2002) and find that the samples inKahl (2002) and our paper are quite comparable Kahl (2002). uses a sample of 102 firms which consist of Chapter 11s (56 firms, 54.9%) and private renegotiation firms (46 firms, 45.1%) during a period of 1979-1983.…”

Can corporate governance save distressed firms from bankruptcy? An empirical analysis

“…See footnote 3 for the definition of the Z score. 12 Recent studies using these measures are Dichev (1998) (Z score) and Kahl (2003) (ICR). 13 Left-censoring refers to the situation in which a starting value is only known to be within a range.…”