Does ownership structure affect the degree of corporate financial distress in China?

Dan Hu

42 citations0/0 files storedJournal of Accounting in Emerging Economies

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

Abstract

Purpose – The purpose of this paper is to investigate the degree of corporate financial distress (DOFD) and relationship between ownership structure and the DOFD in China. Design/methodology/approach – The authors estimate the DOFD across a sample of 378 Chinese-listed companies that got into financial distress between 2000 and 2008. The DOFD reflects long-term solvency capability, short-term liquidity capability, development capability, risk level, profitability capability, operating capacity, and cash flow capability. The authors analyze the relationship between ownership structure and the DOFD in these companies, using the panel data analysis method. Findings – The authors find that a concentrated ownership structure is negatively related to the DOFD. Further, the results indicate that a state-owned status helps firms in decreasing their DOFD and that the separation of cash-flow rights and control rights is positively related to the DOFD. The authors also found that the Chinese special treatment (ST) system needs further improvement. The reason is that ST firms can be classified into “value” ST firms and “garbage” ST firms. They have different DOFD and change trend, so they should not be treated equally. Originality/value – This paper find that Chinese ST system and previous research are not helpful for risk-seeking investor to distinguish and evaluate “value” ST firms and “garbage” ST firms. It is unfair to warn and punish this two kinds of firms equally, so ST system should be improved. The authors also suggest that risk-seeking investor can choose ST firms that have a concentrated ownership structure and are controlled by the state or local government. These findings are not observed in previous studies.

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References

1976Theory of the firm: Managerial behavior, agency costs and ownership structure 1968FINANCIAL RATIOS, DISCRIMINANT ANALYSIS AND THE PREDICTION OF CORPORATE BANKRUPTCY 1999Corporate Ownership Around the World 1986Large Shareholders and Corporate Control 2002Disentangling the Incentive and Entrenchment Effects of Large Shareholdings 1980Takeover Bids, The Free-Rider Problem, and the Theory of the Corporation 1984Methodological Issues Related to the Estimation of Financial Distress Prediction Models 1983The Structure of Ownership and the Theory of the Firm

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