Does bank shareholding affect corporate debt restructuring? Evidence from financially distressed firms in China

Abstract

ABSTRACT This paper investigates the impact of bank shareholding on corporate debt restructuring. Using a sample of financially distressed firms in China from 2007 to 2016, we find that distressed firms with bank shareholders are more likely to restructure their debt than firms without bank shareholders. Moreover, the alleviation of renegotiation friction in both distressed state-owned enterprises (SOEs) and non-state-owned enterprises (non-SOEs) and reducing information asymmetry in non-SOEs facilitate the positive impacts of bank shareholding on debt restructuring. In addition, the impact is more evident in distressed non-SOEs characterized by higher profitability prior to restructuring. Further, distressed non-SOEs with bank shareholders are more likely to recover from distress than their peers, while the results are opposite for distressed SOEs. We argue that while bank shareholding facilitates restructuring in distressed non-SOEs, it aggravates the soft budget constraint in troubled SOEs. Our results are robust after accounting for the selection bias of bank shareholding.