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Corporate response to distress: evidence from the Asian financial crisis

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  • Mara Faccio
  • Rajdeep Sengupta

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.

Suggested Citation

  • Mara Faccio & Rajdeep Sengupta, 2006. "Corporate response to distress: evidence from the Asian financial crisis," Working Papers 2006-044, Federal Reserve Bank of St. Louis.
  • Handle: RePEc:fip:fedlwp:2006-044
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    References listed on IDEAS

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    Cited by:

    1. Ilhyock Shim & Goetz von Peter, 2007. "Distress selling and asset market feedback," BIS Working Papers 229, Bank for International Settlements.
    2. Konov, Joshua Ioji / JK, 2013. "Enhancing Markets (i.e. Economies) Transmissionability to Optimize Monetary Policies’ Effect," MPRA Paper 46950, University Library of Munich, Germany.
    3. Konov, Joshua Ioji, 2012. "Market Economy under Rapid Globalization and Rising Productivity," MPRA Paper 48750, University Library of Munich, Germany.

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    Keywords

    Corporate governance ; Financial crises - Asia;

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