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Corporate Response to Distress: Evidence from the Asian Financial Crisis

Mara Faccio and Rajdeep Sengupta

Working Paper 2006-044A http://research.stlouisfed.org/wp/2006/2006-044.pdf

July 2006

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CORPORATE RESPONSE TO DISTRESS: EVIDENCE FROM THE ASIAN FINANCIAL CRISIS

Mara Faccio and Rajdeep Sengupta *

July 2006

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)...