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Can investors restrict managerial behavior in distressed firms?

Pryshchepa, Oksana and Aretz, Kevin and Banerjee, Shantanu (2013) Can investors restrict managerial behavior in distressed firms? Journal of Corporate Finance, 23. pp. 222-239. ISSN 0929-1199

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    Abstract

    In this article, we show that only distressed firms not identified as distressed by creditors are able to transfer wealth from creditors to shareholders. Using the number of years to future bankruptcy as a proxy for genuine distress and measures based on observable firm characteristics as proxies for perceived distress, genuinely distressed firms incorrectly perceived as healthy cut payouts to shareholders more slowly and invest more aggressively as uncertainty increases than correctly identified distressed firms. Consistent with the idea that incorrectly identified distressed firms actively hide their troubles, we show that they tend to follow more aggressive accounting policies and often resort to earnings misstatements. We also show that they are often not restricted by covenants and can borrow further debt capital at affordable rates, suggesting that a lack of monitoring by creditors allows them to transfer wealth to shareholders.

    Item Type: Article
    Journal or Publication Title: Journal of Corporate Finance
    Uncontrolled Keywords: Agency conflicts ; Financial distress ; Firm investment ; Expected volatility
    Subjects:
    Departments: Lancaster University Management School > Accounting & Finance
    ID Code: 67388
    Deposited By: ep_importer_pure
    Deposited On: 03 Nov 2013 18:55
    Refereed?: Yes
    Published?: Published
    Last Modified: 18 Dec 2017 06:14
    Identification Number:
    URI: http://eprints.lancs.ac.uk/id/eprint/67388

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