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Corporate response to distress: evidence from the Asian financial crisis

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Mara Faccio
Rajdeep Sengupta

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Abstract

This paper provides a comprehensive examination of the ways in which companies respond to a country-wide crisis through the restructuring of their assets (through asset sales, mergers or liquidations) or liabilities. We find the restructuring of liabilities to be the most common type of response. On the other hand, we argue that firms may be reluctant to engage in major asset sales due to substantial price discounts that need to be applied to these transactions during the crisis. In fact, we document that transaction multiples dropped by 40% during the crisis, compared to a pre-crisis period. We contrast financial and corporate governance considerations and find strong support for the notion that, during a crisis, financial constraints have a large impact on the restructuring choice. However, we find corporate governance (e.g., control) considerations to matter only marginally both in statistical and economic terms.

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Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2006-044.

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Date of creation: 2006
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Handle: RePEc:fip:fedlwp:2006-044

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Keywords: Corporate governance Financial crises - Asia

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  17. Claessens, Stijn & Djankov, Simeon & Klapper, Leora, 2003. "Resolution of corporate distress in East Asia," Journal of Empirical Finance, Elsevier, vol. 10(1-2), pages 199-216, February. [Downloadable!] (restricted)
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  19. Shleifer, Andrei & Vishny, Robert W, 1992. " Liquidation Values and Debt Capacity: A Market Equilibrium Approach," Journal of Finance, American Finance Association, vol. 47(4), pages 1343-66, September. [Downloadable!] (restricted)
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