Distress and restructuring in China: Does ownership matter?

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.