This research revealed the factors that cause firm distress in the Chinese market. The stock exchange–listed firm samples are classified as moderate or severe distressed firms if they receive a special treatment warning from stock exchanges due to continuous negative net loss or are suffering from negative equities. By applying ordinary least square and logit regressions to the 2015–2022 data sample, the results showed that market power and internal and external monitoring significantly affect the likelihood of firm distress. Interestingly, debt only negatively affects a firm's earnings, has no impact on moderate firm distress, and reduces the likelihood of falling into severe distress. State-owned enterprises (SOEs) receive government support and are therefore less likely to be distressed, in contrast to family-owned firms. The recovery results confirmed that SOEs are easier to recover that family-owned firms. The ability to repay debt increases credibility and is a good signal of recovery. We differentiated from past discussions that focused on earning management and business failure. Our research contributes to the literature by analyzing firm distress and recovery from market power and monitoring, which are not well discussed with observable evidence. These findings could be helpful for both corporate and regulatory policy decision-making.
Citation: Dachen Sheng, Opale Guyot. Market power, internal and external monitoring, and firm distress in the Chinese market[J]. Data Science in Finance and Economics, 2024, 4(2): 285-308. doi: 10.3934/DSFE.2024012
This research revealed the factors that cause firm distress in the Chinese market. The stock exchange–listed firm samples are classified as moderate or severe distressed firms if they receive a special treatment warning from stock exchanges due to continuous negative net loss or are suffering from negative equities. By applying ordinary least square and logit regressions to the 2015–2022 data sample, the results showed that market power and internal and external monitoring significantly affect the likelihood of firm distress. Interestingly, debt only negatively affects a firm's earnings, has no impact on moderate firm distress, and reduces the likelihood of falling into severe distress. State-owned enterprises (SOEs) receive government support and are therefore less likely to be distressed, in contrast to family-owned firms. The recovery results confirmed that SOEs are easier to recover that family-owned firms. The ability to repay debt increases credibility and is a good signal of recovery. We differentiated from past discussions that focused on earning management and business failure. Our research contributes to the literature by analyzing firm distress and recovery from market power and monitoring, which are not well discussed with observable evidence. These findings could be helpful for both corporate and regulatory policy decision-making.
| [1] |
Ahn S, Choi W (2009) The role of bank monitoring in corporate governance: Evidence from borrowers' earnings management behavior. J bank Financ 33: 425–434. https://doi.org/10.1016/j.jbankfin.2008.08.013 doi: 10.1016/j.jbankfin.2008.08.013
|
| [2] |
Al‐Hadi A, Chatterjee B, Yaftian A, et al. (2019) Corporate social responsibility performance, financial distress and firm life cycle: evidence from Australia. Account Financ 59: 961–989. https://doi.org/10.1111/acfi.12277 doi: 10.1111/acfi.12277
|
| [3] |
Álvarez L, García-Posada M, Mayordomo S (2023) Distressed firms, zombie firms and zombie lending: a taxonomy. J Bank Financ 149: 106762. https://doi.org/10.1016/j.jbankfin.2023.106762 doi: 10.1016/j.jbankfin.2023.106762
|
| [4] |
Andreou CK, Andreou PC, Lambertides N (2021) Financial distress risk and stock price crashes. J Corp Financ 67: 101870. https://doi.org/10.1016/j.jcorpfin.2020.101870 doi: 10.1016/j.jcorpfin.2020.101870
|
| [5] |
Babenko I (2009) Share repurchases and pay‐performance sensitivity of employee compensation contracts. J Financ 64: 117–150. https://doi.org/10.1111/j.1540-6261.2008.01430.x doi: 10.1111/j.1540-6261.2008.01430.x
|
| [6] |
Bhattacharya A, Morgan NA, Rego LL (2022) Examining why and when market share drives firm profit. J Marketing 86: 73–94. https://doi.org/10.1177/00222429211031922 doi: 10.1177/00222429211031922
|
| [7] |
Boone JP, Khurana IK, Raman KK (2010) Do the Big 4 and the second-tier firms provide audits of similar quality? J Account Public Pol 29: 330–352. https://doi.org/10.1016/j.jaccpubpol.2010.06.007 doi: 10.1016/j.jaccpubpol.2010.06.007
|
| [8] |
Chang HY, Liang LH, Yu HF (2019) Market power, competition and earnings management: accrual-based activities. J Financ Econ Policy 11: 368–384. https://doi.org/10.1108/JFEP-08-2018-0108 doi: 10.1108/JFEP-08-2018-0108
|
| [9] |
Chang K, Kang E, Li Y (2016) Effect of institutional ownership on dividends: An agency-theory-based analysis. J Bus Res 69: 2551–2559. https://doi.org/10.1016/j.jbusres.2015.10.088 doi: 10.1016/j.jbusres.2015.10.088
|
| [10] |
Charitou A, Lambertides N, Trigeorgis L (2007) Managerial discretion in distressed firms. Brit Account Rev 39: 323–346. https://doi.org/10.1016/j.bar.2007.08.003 doi: 10.1016/j.bar.2007.08.003
|
| [11] |
Chen CJ, He W, Lu CJ, et al. (2022) Bank loan covenants, accrual quality and firms' information environment. Account Financ 62: 547–575. https://doi.org/10.1111/acfi.12798 doi: 10.1111/acfi.12798
|
| [12] |
Chen JZ, Lobo GJ, Wang Y, et al. (2013) Loan collateral and financial reporting conservatism: Chinese evidence. J Bank Financ 37: 4989–5006. https://doi.org/10.1016/j.jbankfin.2013.09.003 doi: 10.1016/j.jbankfin.2013.09.003
|
| [13] |
Chen L, Gao F, Guo T, et al. (2023) Mixed ownership reform and the short-term debt for long-term investment of non-state-owned enterprises: Evidence from China. Int Rev Financ Anal 90: 102861. https://doi.org/10.1016/j.irfa.2023.102861 doi: 10.1016/j.irfa.2023.102861
|
| [14] |
Chen Y, Huang Y, Wen M (2023) Accounts Receivable Reform and Financing Constraints: Evidence from China's A-Share Market. Emerg Mark Financ Trade 1–26. https://doi.org/10.1080/1540496X.2023.2298255 doi: 10.1080/1540496X.2023.2298255
|
| [15] |
Clinch G, Sidhu B, Sin S (2002) The usefulness of direct and indirect cash flow disclosures. Rev Account Stud 7: 383–404. https://doi.org/10.1023/A:1020759511460 doi: 10.1023/A:1020759511460
|
| [16] |
Cook DO, Zhang W (2022) CEO option incentives and corporate share repurchases. Int Rev Econ Financ 78: 355–376. https://doi.org/10.1016/j.iref.2021.12.002 doi: 10.1016/j.iref.2021.12.002
|
| [17] |
Córdoba‐Pachón JR, Garde‐Sánchez R, Rodríguez‐Bolívar MP (2014) A systemic view of corporate social responsibility (CSR) in state‐owned enterprises (SOEs). Knowl Process Manag 21: 206–219. https://doi.org/10.1002/kpm.1453 doi: 10.1002/kpm.1453
|
| [18] |
Demydyuk G, Shawky HA, Rest JVD, et al. (2015) Key operating indicators to lever financial performance of publicly traded restaurant companies: a market's perspective from 2007–2011. Int J Revenue Manag 8: 165–192. https://doi.org/10.1504/IJRM.2015.070006 doi: 10.1504/IJRM.2015.070006
|
| [19] |
Elyasiani E, Jia J (2010) Distribution of institutional ownership and corporate firm performance. J Bank Financ 34: 606–620. https://doi.org/10.1016/j.jbankfin.2009.08.018 doi: 10.1016/j.jbankfin.2009.08.018
|
| [20] |
Emery GW, Marques MA (2011) The effect of transaction costs, payment terms and power on the level of raw materials inventories. J Oper Manage 29: 236–249. https://doi.org/10.1016/j.jom.2010.11.003 doi: 10.1016/j.jom.2010.11.003
|
| [21] |
Fabbri D, Klapper LF (2016) Bargaining power and trade credit. J Corp Financ 41: 66–80. https://doi.org/10.1016/j.jcorpfin.2016.07.001 doi: 10.1016/j.jcorpfin.2016.07.001
|
| [22] |
Farooq U, Jibran Qamar MA, Haque A (2018) A three-stage dynamic model of financial distress. Manag Financ 44: 1101–1116. https://doi.org/10.1108/MF-07-2017-0244 doi: 10.1108/MF-07-2017-0244
|
| [23] |
García‐Teruel PJ, Martínez‐Solano P (2010) A dynamic approach to accounts receivable: a study of Spanish SMEs. Eur Financ Manag 16: 400–421. https://doi.org/10.1111/j.1468-036X.2008.00461.x doi: 10.1111/j.1468-036X.2008.00461.x
|
| [24] |
Grundy T (2006) Rethinking and reinventing Michael Porter's five forces model. Strateg Chang 15: 213–229. https://doi.org/10.1002/jsc.764 doi: 10.1002/jsc.764
|
| [25] |
Gustafson MT, Ivanov IT, Meisenzahl RR (2021) Bank monitoring: Evidence from syndicated loans. J Financ Econ 139: 452–477. https://doi.org/10.1016/0378-4266(95)00006-2 doi: 10.1016/0378-4266(95)00006-2
|
| [26] |
Han X, Epetia MCF, Cheng Y (2021) "Subsidies" or "taxes"? Corporate credit misallocation induced by the nexus of state-owned enterprises and state-owned banks. J Asian Econ 76: 101346. https://doi.org/10.1016/j.asieco.2021.101346 doi: 10.1016/j.asieco.2021.101346
|
| [27] |
Habib AM (2023) Do business strategies and environmental, social, and governance (ESG) performance mitigate the likelihood of financial distress? A multiple mediation model. Heliyon 9. https://doi.org/10.1016/j.heliyon.2023.e17847 doi: 10.1016/j.heliyon.2023.e17847
|
| [28] |
Habib AM, Kayani UN (2022) Does the efficiency of working capital management affect a firm's financial distress? Evidence from UAE. Corp Gov Int J Bus Soc 22: 1567–1586. https://doi.org/10.1108/CG-12-2021-0440 doi: 10.1108/CG-12-2021-0440
|
| [29] |
Hertzel MG, Li Z, Officer MS, et al. (2008) Inter-firm linkages and the wealth effects of financial distress along the supply chain. J Financ Econ 87: 374–387. https://doi.org/10.1016/j.jfineco.2007.01.005 doi: 10.1016/j.jfineco.2007.01.005
|
| [30] |
Huang Z, Li Z (2021) What reflects investor sentiment? Empirical evidence from China. Data Sci Financ Econ 1: 235–252. https://doi.org/10.3934/DSFE.2021013 doi: 10.3934/DSFE.2021013
|
| [31] |
Kahl M, Shivdasani A, Wang Y (2015) Short‐term debt as bridge financing: Evidence from the commercial paper market. J Financ 70: 211–255. https://doi.org/10.1111/jofi.12216 doi: 10.1111/jofi.12216
|
| [32] |
Lee KW, Sharpe IG (2009) Does a bank's loan screening and monitoring matter? J Financ Serv Res 35: 33–52. https://doi.org/10.1007/s10693-008-0041-8 doi: 10.1007/s10693-008-0041-8
|
| [33] |
Leverty JT, Grace MF (2012) Dupes or incompetents? An examination of management's impact on firm distress. J Risk Insur 79: 751–783. https://doi.org/10.1111/j.1539-6975.2011.01443.x doi: 10.1111/j.1539-6975.2011.01443.x
|
| [34] |
Li S, Wu Y (2022) Government subsidies, ownership structure and operating performance of state-owned enterprises: evidence from China. Appl Econ 54: 6480–6496. https://doi.org/10.1080/00036846.2022.2069671 doi: 10.1080/00036846.2022.2069671
|
| [35] |
Miarka T, Tröge M (2005) Do bank–firm relationships reduce bank debt? Evidence from Japan. Eur J Financ 11: 75–92. https://doi.org/10.1080/1351847032000168687 doi: 10.1080/1351847032000168687
|
| [36] |
Nam H, Uchida K (2019) Accounts payable and firm value: International evidence. J Bank Financ Financ 102: 116–137. https://doi.org/10.1016/j.jbankfin.2019.03.010 doi: 10.1016/j.jbankfin.2019.03.010
|
| [37] |
Navissi F, Naiker V (2006) Institutional ownership and corporate value. Manag Financ 32: 247–256. https://doi.org/10.1108/03074350610646753 doi: 10.1108/03074350610646753
|
| [38] |
Novy-Marx R (2011) Operating leverage. Rev Financ 15: 103–134. https://doi.org/10.1093/rof/rfq019 doi: 10.1093/rof/rfq019
|
| [39] |
Nuta AC, Habib AM, Neslihanoglu S, et al. (2024) Analyzing the market performance of Romanian firms: do the COVID-19 crisis and classification type matter? Int J Emerg Market. https://doi.org/10.1108/IJOEM-05-2023-0842 doi: 10.1108/IJOEM-05-2023-0842
|
| [40] |
Opler TC, Titman S (1994) Financial distress and corporate performance. J Financ 49: 1015–1040. https://doi.org/10.1111/j.1540-6261.1994.tb00086.x doi: 10.1111/j.1540-6261.1994.tb00086.x
|
| [41] |
Pianeselli D, Zaghini A (2014) The cost of firms' debt financing and the global financial crisis. Financ Res Lett 11: 74–83. https://doi.org/10.1016/j.frl.2013.12.002 doi: 10.1016/j.frl.2013.12.002
|
| [42] |
Poncet S, Steingress W, Vandenbussche H (2010) Financial constraints in China: Firm-level evidence. China Econ Rev 21: 411–422. https://doi.org/10.1016/j.chieco.2010.03.001 doi: 10.1016/j.chieco.2010.03.001
|
| [43] |
Rajan R, Winton A (1995) Covenants and collateral as incentives to monitor. J Financ 50: 1113–1146. https://doi.org/10.1111/j.1540-6261.1995.tb04052.x doi: 10.1111/j.1540-6261.1995.tb04052.x
|
| [44] |
Safdar R, Chaudhry NI, Mirza SS, et al. (2019) Principal–principal agency conflict and information quality in China: The governance role of audit quality and analyst following. J Financ Report Account 17: 42–59. https://doi.org/10.1108/JFRA-07-2017-0052 doi: 10.1108/JFRA-07-2017-0052
|
| [45] |
Saleemi J (2023) Political-obsessed environment and investor sentiments: pricing liquidity through the microblogging behavioral perspective. Data Sci Financ Econ 3: 196–207. https://doi.org/10.3934/DSFE.2023012 doi: 10.3934/DSFE.2023012
|
| [46] |
Sano K (2022) Intelligence and global bias in the stock market. Data Sci Financ Econ 3: 184–195. https://doi.org/10.3934/DSFE.2023011 doi: 10.3934/DSFE.2023011
|
| [47] |
Sevinç, D. (2022). Volatility spillovers among MIST stock markets. Data Sci Financ Econ 2: 80–95. https://doi.org/10.3934/DSFE.2022004 doi: 10.3934/DSFE.2022004
|
| [48] |
Shahwan TM, Habib AM (2020) Does the efficiency of corporate governance and intellectual capital affect a firm's financial distress? Evidence from Egypt. J Intellect Cap 21: 403–430. https://doi.org/10.1108/JIC-06-2019-0143 doi: 10.1108/JIC-06-2019-0143
|
| [49] |
Shaikh I, Randhawa K (2022) Managing the risks and motivations of technology managers in open innovation: Bringing stakeholder-centric corporate governance into focus. Technovation 114: 102437. https://doi.org/10.1016/j.technovation.2021.102437 doi: 10.1016/j.technovation.2021.102437
|
| [50] |
Sudarsanam S, Lai J (2001) Corporate financial distress and turnaround strategies: An empirical analysis. Brit J Manage 12: 183–199. https://doi.org/10.1111/1467-8551.00193 doi: 10.1111/1467-8551.00193
|
| [51] |
Tang Q, Chow CW, Lau A (1999) Auditing of state-owned enterprises in China: historic development, current practice and emerging issues. Int J Account 34: 173–187. https://doi.org/10.1016/S0020-7063(99)00008-4 doi: 10.1016/S0020-7063(99)00008-4
|
| [52] |
Turetsky HF, McEwen RA (2001) An empirical investigation of firm longevity: A model of the ex ante predictors of financial distress. Rev Quant Financ Account 16: 323–343. https://doi.org/10.1023/A:1011291425075 doi: 10.1023/A:1011291425075
|
| [53] |
Ukaegbu B (2014) The significance of working capital management in determining firm profitability: Evidence from developing economies in Africa. Res Int Bus Financ 31: 1–16. https://doi.org/10.1016/j.ribaf.2013.11.005 doi: 10.1016/j.ribaf.2013.11.005
|
| [54] |
Wang Y, Xia H (2014) Do lenders still monitor when they can securitize loans? Rev Financ Stud 27: 2354–2391. https://doi.org/10.1093/rfs/hhu006 doi: 10.1093/rfs/hhu006
|
| [55] |
Wang XY, Shan W (2013) Chairperson's government background, excess employment and government subsidies: evidence from Chinese local state-owned enterprises. China J Account Res 6: 51–74. https://doi.org/10.1016/j.cjar.2012.08.005 doi: 10.1016/j.cjar.2012.08.005
|
| [56] |
Yeung G (2009) How banks in China make lending decisions. J Contemp China 18: 285–302. https://doi.org/10.1080/10670560802576034 doi: 10.1080/10670560802576034
|
| [57] |
Zhang W (2015) R & D investment and distress risk. J Empir Financ 32: 94–114. https://doi.org/10.1016/j.jempfin.2015.03.009 doi: 10.1016/j.jempfin.2015.03.009
|
| [58] |
Zhu Q, Liu J, Lai KH (2016) Corporate social responsibility practices and performance improvement among Chinese national state-owned enterprises. Int J Prod Econ 171: 417–426. https://doi.org/10.1016/j.ijpe.2015.08.005 doi: 10.1016/j.ijpe.2015.08.005
|
| [59] |
Zou H, Adams MB (2008) Debt capacity, cost of debt, and corporate insurance. J Financ Quant Anal 43: 433–466. https://doi.org/10.1017/S0022109000003586 doi: 10.1017/S0022109000003586
|
| [60] |
Zulkhibri M (2015) Interest burden and external finance choices in emerging markets: Firm-level data evidence from Malaysia. Int Econ 141: 15–33. https://doi.org/10.1016/j.inteco.2014.11.002 doi: 10.1016/j.inteco.2014.11.002
|
Dachen Sheng, Opale Guyot. Market power, internal and external monitoring, and firm distress in the Chinese market[J]. Data Science in Finance and Economics, 2024, 4(2): 285-308. doi: 10.3934/DSFE.2024012
DownLoad: