M&A Activity, Financial Distress, and Trade Credit

2016 ◽  
pp. 51-72
Author(s):  
Mine Uğurlu
Keyword(s):  
Financial Distress ◽  
Small Firms ◽  
Trade Credit ◽  
Emerging Market ◽  
Financing Constraints ◽  
Capital Investments ◽  
High Likelihood ◽  
Positive Relation ◽  
Pecking Order ◽  
Distressed Firms

This paper investigates the effects of firm constraints on the likelihood of M&A involvement and explores if mergers mitigate financing constraints. The results display that young and small firms facing financial constraints, corporations that have low R&D expenditures and capital investments have higher likelihood of M&A activity. Firms that compete in technology-driven industries are more likely to merge. Equity- constrained firms have high likelihood of M&A involvement while cash insolvency and leverage are not significantly related with mergers. The results support the positive relation between the use of trade credit and financial distress displayed in previous studies, but reveal that distressed firms involved in mergers reduce trade credit significantly. Results indicate that mergers mitigate the positive relation between distress and trade credit. Distressed firms involved in mergers avoid payables which rank lower in pecking order finance. M&As seem to alleviate financing constraints for cash-constrained corporations in an emerging market.

scholarly journals Tracing the Impact of Bank Liquidity Shocks: Evidence from an Emerging Market

2008 ◽  
Vol 98 (4) ◽  
pp. 1413-1442 ◽  
Author(s):  
Asim Ijaz Khwaja ◽  
Atif Mian
Keyword(s):  
Financial Distress ◽  
Small Firms ◽  
Emerging Market ◽  
Credit Market ◽  
Large Firms ◽  
Liquidity Shocks ◽  
Political Ties ◽  
Nuclear Tests ◽  
The Impact ◽  
Do So

We examine the impact of liquidity shocks by exploiting cross-bank liquidity variation induced by unanticipated nuclear tests in Pakistan. We show that for the same firm borrowing from two different banks, its loan from the bank experiencing a 1 percent larger decline in liquidity drops by an additional 0.6 percent. While banks pass their liquidity shocks on to firms, large firms—particularly those with strong business or political ties—completely compensate this loss by additional borrowing through the credit market. Small firms are unable to do so and face large drops in overall borrowing and increased financial distress. (JEL E44, G21, G32, L25)

scholarly journals Corporate Financial Constraints and Internal Capital Markets: Evidence from Emerging Countries

2016 ◽  
Vol 6 (1) ◽  
pp. 25 ◽  
Author(s):  
Mine Ugurlu ◽  
Ayse Altiok-Yilmaz ◽  
Elif Akben-Selcuk
Keyword(s):  
Capital Markets ◽  
Financial Constraints ◽  
Trade Credit ◽  
Business Groups ◽  
Emerging Countries ◽  
Internal Capital Markets ◽  
Financing Constraints ◽  
Positive Relation ◽  
Internal Capital ◽  
Cash Flow Sensitivity

This paper investigates whether the internal capital markets of business groups mitigate the financial constraints of affiliated firms,and affect their financing policies.It aims to extend the evidence on internal capital markets to emerging countries where financing constraints are prevalent, and adds to the literature on trade credit by revealing that the distressed group-affiliated firms rely less on trade credit than their non-affiliated counterparts despite the positive relation between trade credit and distress. Group firms that have high investments in prior periods use less trade credit in the subsequent periods than non-affiliated firms. The study rests on panel data regressions covering 3906 firms from six emerging countries for the 2006-2012 period. The findings indicate that the Q-sensitivity of the investments of affiliated firms is lower than that of their unaffiliated counterparts in all countries and that the investment cash flow sensitivity of affiliates is lower in five countries, strongly indicating that group-affiliated firms are financially less constrained. The distressed group firms use significantly lower leverage than distressed unaffiliated firms despite the positive relation between distress and leverage. Group firms in high–Q industries invest less than unaffiliated firms. This paper contributes to the existing literature on internal capital markets by expanding the scope to emerging countries where market imperfections and financing constraints are more pronounced, and provides strong evidence for the role of business groups, prevalent in most emerging countries, in mitigating the constraints on the investments and financing choices of the group-affiliated firms. 

scholarly journals Effects of financial distress and financing constraints on trade credit provisions

2020 ◽  
Vol 28 (4) ◽  
pp. 545-566
Author(s):  
Igbekele Sunday Osinubi
Keyword(s):  
Financial Distress ◽  
Financial Constraints ◽  
Trade Credit ◽  
Financing Constraints ◽  
Financial Constraint ◽  
Significant Positive Effect ◽  
Content Type ◽  
Negative Effect ◽  
The Uk ◽  
Positive Effect

PurposeExisting studies that documented the effect of financial distress on trade credit provisions did not include measures financial constraint. It is possible that financial distress is tie to financial constraints, and both financial distress and financial constraints mutually reinforce each other in their effects on trade credit provision. The purpose of this study is to evaluate the effects of financial constraint and financial distress on trade credit provisions in the UK FTSE 350 listed firms.Design/methodology/approachThis study employs panel data in the estimation of the determinants of accounts payables and accounts receivables of the UK FTSE 350 firms from 2009 to 2017.FindingsThis study finds that financial distress has significant positive effect on accounts payables and a significant negative effect on accounts receivables. Financial constraints have significant negative effect on accounts payables and a significant positive effect on accounts receivables.Practical implicationsTrade creditor desiring to maintain an enduring product-market relationship grant more concessions to customer in financial distress. The amount of trade credit that sellers provide to financially constrained firm is an increasing function of the buyer's creditworthiness. The urgent cash needs of financially distressed firms lead them to sell trade receivables to factoring company leading to reduction in trade receivables. Firm facing external financing constraints increase trade credit to customers in anticipation of cash flow inflow to enhance liquidity.Originality/valueThis study shows that financial distress and financial constraints mutually reinforce each other in their effects on trade credit provisions, and firm's financing condition contributes to divergence in trade credit policies.

Financial Distress, Earnings Benchmark and Earnings Management Practices

2021 ◽  
pp. 097226292110109
Author(s):  
Karan Gandhi
Keyword(s):  
Panel Data ◽  
Earnings Management ◽  
Financial Distress ◽  
Management Practices ◽  
Real Earnings Management ◽  
Public Companies ◽  
Large Panel ◽  
Distressed Firms ◽  
Contradictory Evidence ◽  
Financially Distressed

Prior research exhibits contradictory evidence on earnings management practices, both accrual and real, undertaken by the firms in state of financial distress. This study uniquely examines the issue in the presence of earnings-increasing earnings management motivation- meeting earnings benchmark of avoiding losses. For examining the issue, this study analyzes large panel data of Indian public companies for the period 2000–2016. The findings indicate prevalence of earnings-decreasing real earnings management practices, that is, decrease in overproduction and increase in spending on discretionary expenses, in financially distressed firms despite there being motivation to increase earnings to avoid losses. No evidence of accrual earnings management practices has been observed in such firms.

scholarly journals Small firms and the COVID-19 insolvency gap

2021 ◽  
Author(s):  
Julian Oliver Dörr ◽  
Georg Licht ◽  
Simona Murmann
Keyword(s):  
Financial Distress ◽  
Small Firms ◽  
English Summary ◽  
Policy Support ◽  
Policy Response ◽  
Special Role ◽  
Current Crisis ◽  
Policy Makers ◽  
Large Wave ◽  
Using Data

AbstractCOVID-19 placed a special role on fiscal policy in rescuing companies short of liquidity from insolvency. In the first months of the crisis, SMEs as the backbone of Germany’s economy benefited from large and mainly indiscriminate aid measures. Avoiding business failures in a whatever-it-takes fashion contrasts, however, with the cleansing mechanism of economic crises: a mechanism which forces unviable firms out of the market, thereby reallocating resources efficiently. By focusing on firms’ pre-crisis financial standing, we estimate the extent to which the policy response induced an insolvency gap and analyze whether the gap is characterized by firms which were already struggling before the pandemic. With the policy measures being focused on smaller firms, we also examine whether this insolvency gap differs with respect to firm size. Our results show that the COVID-19 policy response in Germany has triggered a backlog of insolvencies that is particularly pronounced among financially weak, small firms, having potential long-term implications on entrepreneurship and economic recovery.Plain English Summary This study analyzes the extent to which the strong policy support to companies in the early phase of the COVID-19 crisis has prevented a large wave of corporate insolvencies. Using data of about 1.5 million German companies, it is shown that it was mainly smaller firms that experienced strong financial distress and would have gone bankrupt without policy assistance. In times of crises, insolvencies usually allow for a reallocation of employees and capital to more efficient firms. However, the analysis reveals that this ‘cleansing effect’ is hampered in the current crisis as the largely indiscriminate granting of liquidity subsidies and the temporary suspension of the duty to file for insolvency have caused an insolvency gap that is driven by firms which were already in a weak financial position before the crisis. Overall, the insolvency gap is estimated to affect around 25,000 companies, a substantial number compared to the around 16,300 actual insolvencies in 2020. In the ongoing crisis, policy makers should prefer instruments favoring entrepreneurs who respond innovatively to the pandemic instead of prolonging the survival of near-insolvent firms.

scholarly journals Predicting Firms’ Financial Distress: An Empirical Analysis Using the F-Score Model

2021 ◽  
Vol 14 (5) ◽  
pp. 199
Author(s):  
Mahfuzur Rahman ◽  
Cheong Li Sa ◽  
Md. Abdul KaiumMasud
Keyword(s):  
Prediction Model ◽  
Financial Distress ◽  
The United States ◽  
Research Database ◽  
Negative Consequences ◽  
Return On Assets ◽  
Listed Firms ◽  
Distressed Firms ◽  
Score Model ◽  
Relationship Of

Financial performance of firms is very important to bankers, shareholders, potential investors, and creditors. The inability of firms to meet their liabilities will affect all its stakeholders and will result in negative consequences in the wider economy. The objective of the study is to explore the applicability of a distress prediction model which uses the F-Score and its components to identify firms which are at high risk of going into default. The study incorporates a prediction model and vast literature to address the research questions. The sample of the study is collected from publicly listed firms of the United States. In total, 81 financially distressed firms wereextracted from the UCLA-LoPucki Bankruptcy Research Database during 2009–2017. This study found that the relationship of the F-Score and probability of firms going into financial distress is significant. This study also demonstrated that firms which are at risk of distress tend to record a negative cash flow from operations (CFO) and showed a greater decline in return on assets (ROA) in the year prior to default. This study extends the existing literature by supporting a model which has not been widely used in the area of financial distress predictions.

scholarly journals Asset Specificity and the Secondary Market for Productive Assets

2020 ◽  
Author(s):  
Simone Boccaletti
Keyword(s):  
Theoretical Model ◽  
Financial Distress ◽  
Financial Constraints ◽  
Secondary Market ◽  
Asset Specificity ◽  
Cost Of Debt ◽  
Debt Contracts ◽  
Trade Off ◽  
Distressed Firms ◽  
Productive Assets

AbstractThe aim of this paper is to explore how debt contracts are affected by investment in asset specialization and by the dynamics of the secondary market for collateralized productive assets. Before applying for a loan, financially constrained firms face a specificity trade-off: asset specialization increases firms’ project returns, but decreases the liquidation value of assets in the secondary market if the firm is in financial distress. To study this trade-off, the paper uses a theoretical model in which the choice of asset specificity and the outcome of the secondary market for distressed firms’ assets are endogenous. High redeployability costs and a small number of participants in the secondary market are associated to low recovery values and to a high cost of debt. The paper shows the conditions under which financial constraints reduce firms’ incentive to invest in asset specificity.

The Strategic Behavior of Firms with Debt

2016 ◽  
Vol 51 (5) ◽  
pp. 1611-1636 ◽  
Author(s):  
Jérôme Reboul ◽  
Anna Toldrà-Simats
Keyword(s):  
Small Firms ◽  
Strategic Behavior ◽  
Financing Constraints ◽  
Large Firms ◽  
Market Shares ◽  
Probability Of Bankruptcy ◽  
The Difference

We empirically study the strategic behavior of levered firms in competitive and noncompetitive environments. We find that regulation induces firms to increase leverage, and this reduces their ability to compete when deregulation occurs. Large and small levered firms adopt different strategies upon deregulation. Whereas more levered small firms charge higher prices to increase margins at the expense of market shares, highly levered large firms prey on their rivals by increasing output and reducing prices to increase their market shares. The difference in their behavior is due to differences in their probability of bankruptcy and their financing constraints.

Buyer’s Bankruptcy Risk, Sourcing Strategy, and Firm Value: Evidence from the Supplier Protection Act

2021 ◽  
Author(s):  
Karca D. Aral ◽  
Erasmo Giambona ◽  
Ye Wang
Keyword(s):  
Operations Management ◽  
Financial Distress ◽  
Firm Value ◽  
Trade Credit ◽  
Treated Group ◽  
Control Group ◽  
Regulatory Change ◽  
Data Set ◽  
Bankruptcy Risk ◽  
Sourcing Strategy

What should a distressed buyer’s sourcing strategy be? We find that this depends on the dynamics in a potential in-court bankruptcy. To establish causality, we use a novel sourcing data set in combination with a unique quasi-natural experimental setting provided by a regulatory shock that significantly strengthened the protection granted to suppliers when a distressed buyer files for bankruptcy: the Supplier Protection Act. We find that, following this regulatory change, the number of suppliers for buyers near financial distress (those most affected by the act, the treated group) increased by nearly 35% relative to financially sound firms (the control group). We also find that this shift allowed distressed buyers to obtain more trade credit, expand inventory holdings, and increase performance, leading to an overall increase in firm value of 7.2%. In turn, these effects led to a sizable reduction in the probability of the affected buyers defaulting and filing for bankruptcy. Our results have important implications for corporate executives: right-sizing the supply base can be critical for buyers near financial distress, and implementing policies to engage and protect suppliers can be the way out of distress. This paper was accepted by Vishal Gaur, operations management.

Can Corporate Social Responsibility Decrease the Negative Influence of Financial Distress on Accounting Quality?

2021 ◽  
Vol 13 (19) ◽  
pp. 11124
Author(s):  
Jun Hyeok Choi ◽  
Saerona Kim ◽  
Dong-Hoon Yang ◽  
Kwanghee Cho
Keyword(s):  
Corporate Social Responsibility ◽  
Social Responsibility ◽  
Earnings Management ◽  
Financial Distress ◽  
Negative Influence ◽  
Accounting Quality ◽  
Distressed Firms ◽  
Corporate Social ◽  
The Impact ◽  
Positive Effect

This study aimed to test how corporate social responsibility (CSR) can affect the impact of corporate financial distress on earnings management. Based on the existing literature, distressed firms tend to hide their financial crises through earnings manipulation. However, as CSR can positively affect companies in terms of performance, risk reduction, and market response, the better a firm’s CSR is the less managers will attempt earnings management even if they experience temporary distress. Consistent with the literature, test results using Korean-listed companies show that distress increased earnings management, and we confirmed that CSR weakened the positive effect of distress on earnings management. After testing each of the CSR subcategories, significant results were found mainly on environmental performance, reflecting the globally increasing interest in environmental issues. This study contributes to the literature on distress and earnings management, which rarely considers CSR as a moderating factor.

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