Regulatory Protection and Opportunistic Bankruptcy

• 成果类型: Article
• 署名作者: Gopalan, Radhakrishnan; Martin, Xiumin; Srinivasan, Kandarp
• 署名单位: Washington University (WUSTL); Northeastern University
• 刊物名称: CONTEMPORARY ACCOUNTING RESEARCH
• ISSN/ISSBN: 0823-9150
• DOI: 10.1111/1911-3846.12828
• 发表日期: 2023
• 页码: 544-576
• 关键词: earnings management; Strategic default; corporate governance; debt structure; inference; finance; RIGHTS; LAW; ENFORCEMENT; accruals

摘要

We document controlling shareholder (insider) opportunism in an insolvency regime that uses an accounting rule to determine bankruptcy eligibility. Our study sheds light on managerial incentives induced by weak investor protection laws. Using unique data on bankrupt firms from an emerging market, consistent with our prediction, we show insiders intentionally manage earnings downward to understate firm net worth so as to be able to file for bankruptcy. Downward pre-bankruptcy earnings management is associated with more payments to insiders and weaker performance, post-filing. A battery of tests suggests our results cannot be fully explained as an artifact of financial distress. Rather, they are consistent with insiders exploiting weak investor protection to extract private benefits at the expense of lenders and outside shareholders. Our study serves as a cautionary tale for all insolvency regimes that use a balance sheet test in an environment with weak creditor protection.