Financial Distress, Asset Sales, and Lender Monitoring

Meziane Lasfer · Puliyur Sudi Sudarsanam · Richard Taffler

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Corporate Insolvency and Governance Corporate Finance and Governance Financial Distress and Bankruptcy Prediction

Abstract

This paper examines the differing reactions of the stock market to divestments by financially distressed and healthy firms, and the impact of lender monitoring on that reaction. For a sample of UK divestors we find excess returns at the time of sell-off announcements are positive and statistically significant, but are far higher for financially distressed firms. These higher returns appear to be an adjustment for reduction in financial distress costs. Consistent with efficient lender monitoring, significantly higher returns are associated with higher levels of debt, especially in the case of distressed firms. The paper concludes that, in the UK at least, the main benefit from divestitures comes from the resolution of financial distress.

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References

1968FINANCIAL RATIOS, DISCRIMINANT ANALYSIS AND THE PREDICTION OF CORPORATE BANKRUPTCY 1985Using daily stock returns 1987Corporate Stakeholders and Corporate Finance 1990Troubled debt restructurings 1984A Further Empirical Investigation of the Bankruptcy Cost Question 1994Anatomy of Financial Distress: An Examination of Junk-Bond Issuers 1995Asset sales and increase in focus 1990Bankruptcy resolution

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