How do banks resolve firms' financial distress? Evidence from Japan

Naohisa Goto, Konari Uchida

Research output: Contribution to journalArticle

4 Citations (Scopus)

Abstract

The main purpose of this paper is to investigate how banks resolve firms' financial distress in Japan. Our results show that distressed firms that have more unsecured bank debt are more likely to restructure debt successfully out of court. Second, private debt restructuring is conducted during the year in which a financially distressed firm would be compelled to report negative net worth because of substantial accounting losses if no debt restructuring plans were implemented. Third, firms that are already in a negative net worth situation are more likely to receive debt forgiveness and/or debt-for-equity swaps. Finally, both the 1-year-lagged total liabilities-to-assets ratio and accounting losses are positively related to the private workout level. These results suggest that banks resolve firms' financial distress in shareholders' and creditors' interests. We argue that, along with bankruptcy laws, the stock exchange rules and the fact that banks are allowed to hold shares in these firms affect the resolution of firms' financial distress.

Original languageEnglish
Pages (from-to)455-478
Number of pages24
JournalReview of Quantitative Finance and Accounting
Volume38
Issue number4
DOIs
Publication statusPublished - May 1 2012

Fingerprint

Japan
Financial distress
Debt
Debt restructuring
Net worth
Liability
Shareholders
Assets
Private debt
Equity
Forgiveness
Swaps
Bankruptcy law
Bank debt
Stock exchange

All Science Journal Classification (ASJC) codes

  • Accounting
  • Business, Management and Accounting(all)
  • Finance

Cite this

How do banks resolve firms' financial distress? Evidence from Japan. / Goto, Naohisa; Uchida, Konari.

In: Review of Quantitative Finance and Accounting, Vol. 38, No. 4, 01.05.2012, p. 455-478.

Research output: Contribution to journalArticle

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