Three essays on financial distress and corporate control
This dissertation analyzes several aspects of financial distress and corporate control. The first chapter argues that the central problem facing creditors during financial distress is to distinguish between economically viable firms and firms that should be liquidated. The incentives of creditors to generate information about a distressed firm's prospects and the effects of this information production on the firm's investment policy are explored. The resulting theory of dynamic liquidation can explain the long-term nature of financial distress solely as the result of socially valuable optimal dynamic learning strategies of creditors, without appealing to bargaining inefficiencies among many creditors or inefficiencies arising from the design of bankruptcy law. The paper discusses implications for the costs of financial distress and bankruptcy law and also contrasts the informational role of debt and dividend payments. The second chapter (co-authored by Gary Gorton) may explain the role that rich investors play in the acquisition of distressed firms. More generally, it contrasts the corporate governance roles of rich individuals and institutional investors (financial intermediaries), exploring the question of the identity of the principal in publicly-owned corporations. Institutional investors are run by professional managers and hence, in contrast to a rich investor, face their own agency problems. We show that the rich investor may deploy his scarce agency cost-free capital to acquire blocks in firms only in situations in which agency conflicts are likely to be severe, for instance during financial distress. Institutional investors play a corporate governance role as permanent blockholders. We show that the identity of a firm's principal can change over time and differ across states. Moreover, identical firms with and without blockholders can coexist. The third chapter describes the history of 110 financially distressed firms for twelve to sixteen years following the onset of financial distress. While liquidations are relatively rare, many firms are acquired within a few years after becoming financially distressed. The performance of the surviving firms improves over time, and the number of firms reporting negative operating income declines dramatically within a few years after the onset of financial distress.
Year of publication: |
1997-01-01
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Authors: | Kahl, Matthias |
Publisher: |
ScholarlyCommons |
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