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Distress and restructuring in China: Does ownership matter?

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  • Kam, Amy
  • Citron, David
  • Muradoglu, Gulnur

Abstract

We investigate the market impact of restructuring announcements made by distressed firms in China. We show that ownership structure is an important determinant of the strength of firms and their survival following distress. For example, mergers and acquisitions are value-enhancing only for competitive firms that are privately owned and when cash payment is involved. Mergers and acquisitions among state-owned enterprises by transferring the controlling ownership, either with or without payment, are not value-enhancing. Also, debt governance is not at work among state-owned enterprises and thus debt-related restructuring is not value-enhancing either. Asset sales are not perceived positively by the market either for competitive or for state-owned firms. This is due to the regulatory environment and lack of effective bankruptcy threat in China; avoiding bankruptcy costs does not add value when bankruptcy is not a powerful threat. The fundamental conclusion is that government ownership has an adverse impact on the distress-resolution process as it distorts resource allocation, management incentives and investment decisions in a liberalised and competitive environment.

Suggested Citation

  • Kam, Amy & Citron, David & Muradoglu, Gulnur, 2008. "Distress and restructuring in China: Does ownership matter?," China Economic Review, Elsevier, vol. 19(4), pages 567-579, December.
  • Handle: RePEc:eee:chieco:v:19:y:2008:i:4:p:567-579
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    References listed on IDEAS

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    Cited by:

    1. Franklin Allen & Jun & Chenying Zhang & Mengxin Zhao, 2012. "China's Financial System: Opportunities and Challenges," NBER Chapters,in: Capitalizing China, pages 63-143 National Bureau of Economic Research, Inc.
    2. Mo, Phyllis L.L. & Rui, Oliver M. & Wu, Xi, 2015. "Auditors' going Concern Reporting in the pre- and post-bankruptcy Law Eras: Chinese Affiliates of Big 4 Versus Local Auditors," The International Journal of Accounting, Elsevier, vol. 50(1), pages 1-30.
    3. repec:eee:pacfin:v:48:y:2018:i:c:p:17-34 is not listed on IDEAS
    4. Bhattacharjee, Arnab & Han, Jie, 2014. "Financial distress of Chinese firms: Microeconomic, macroeconomic and institutional influences," China Economic Review, Elsevier, vol. 30(C), pages 244-262.
    5. Chi, Jing & Sun, Qian & Young, Martin, 2011. "Performance and characteristics of acquiring firms in the Chinese stock markets," Emerging Markets Review, Elsevier, vol. 12(2), pages 152-170, June.
    6. Jonek Kowalska, Izabela, 2015. "Challenges for long-term industry restructuring in the Upper Silesian Coal Basin: What has Polish coal mining achieved and failed from a twenty-year perspective?," Resources Policy, Elsevier, vol. 44(C), pages 135-149.

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