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Management Ownership and Risk-Shifting Investment

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  • Nobuyuki Teshima

    (School of Commerce, Senshu University, Japan)

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    Abstract

    This study analyzes the relationship between management ownership and its risk-shifting incentive. We first present a simple model showing that the risk-shifting incentive of management of financially distressed firms increases as the management ownership of the firm increases. Empirically, we test the hypothesis that under the former Japanese Corporate Reorganization Law, firms with higher management ownership are more likely to use legal rather than private reorganization. Since the reorganization process under the law virtually eliminates the possibility of risk-shifting investment, creditors are more likely to prefer the legal process to private process, when management ownership is higher. Empirical results are consistent with the hypothesis.

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    File URL: http://www.rieb.kobe-u.ac.jp/tjar/article/vol2/pdf/4.Teshima.pdf
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    Bibliographic Info

    Article provided by Research Institute for Economics & Business Administration, Kobe University in its journal The Japanese Accounting Review.

    Volume (Year): 2 (2012)
    Issue (Month): (December)
    Pages: 75-85

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    Handle: RePEc:kob:tjrevi:dec2012:v:2:p:75-85

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    Related research

    Keywords: Management Ownership; Risk Shifting; Debt Restructuring; Reorganization; Bankruptcy;

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    References

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    1. Brown, David T, 1989. "Claimholder Incentive Conflicts in Reorganization: The Role of Bankruptcy Law," Review of Financial Studies, Society for Financial Studies, vol. 2(1), pages 109-23.
    2. Gilson, Stuart C., 1989. "Management turnover and financial distress," Journal of Financial Economics, Elsevier, vol. 25(2), pages 241-262, December.
    3. Gilson, Stuart C., 1990. "Bankruptcy, boards, banks, and blockholders : Evidence on changes in corporate ownership and control when firms default," Journal of Financial Economics, Elsevier, vol. 27(2), pages 355-387, October.
    4. Wruck, Karen Hopper, 1990. "Financial distress, reorganization, and organizational efficiency," Journal of Financial Economics, Elsevier, vol. 27(2), pages 419-444, October.
    5. Dong-Kyoon Kim & Chuck Kwok, 2009. "The influence of managerial incentives on the resolution of financial distress," Review of Quantitative Finance and Accounting, Springer, vol. 32(1), pages 61-83, January.
    6. Franks, Julian R. & Torous, Walter N., 1994. "A comparison of financial recontracting in distressed exchanges and chapter 11 reorganizations," Journal of Financial Economics, Elsevier, vol. 35(3), pages 349-370, June.
    7. Kaplan, Steven N, 1994. "Top Executive Rewards and Firm Performance: A Comparison of Japan and the United States," Journal of Political Economy, University of Chicago Press, vol. 102(3), pages 510-46, June.
    8. Stuart C. Gilson, 1991. "Managing Default: Some Evidence On How Firms Choose Between Workouts And Chapter 11," Journal of Applied Corporate Finance, Morgan Stanley, vol. 4(2), pages 62-70.
    9. Jensen, Michael C & Murphy, Kevin J, 1990. "Performance Pay and Top-Management Incentives," Journal of Political Economy, University of Chicago Press, vol. 98(2), pages 225-64, April.
    10. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
    11. Gilson, Stuart C. & John, Kose & Lang, Larry H. P., 1990. "Troubled debt restructurings*1: An empirical study of private reorganization of firms in default," Journal of Financial Economics, Elsevier, vol. 27(2), pages 315-353, October.
    12. Sadahiko Suzuki & Richard W Wright, 1985. "Financial Structure and Bankruptcy Risk in Japanese Companies," Journal of International Business Studies, Palgrave Macmillan, vol. 16(1), pages 97-110, March.
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