اثرات روابط بانک بر تجدید ساختار بدهی های شرکت خصوصی: شواهدی از بازار نوظهور

Our paper seeks to examine the direct benefit of bank relationships for a distressed borrower by assessing its influence on the success of firm private debt restructuring. We find that a distressed firm with a stronger bank relationship has a greater probability to successfully restructure its debt through private renegotiation. Accordingly, an analysis of credit rating recovery provides complementary evidence on the factors of successful debt restructuring. A duration analysis of the length of time needed for a debt restructuring to be completed is fully consistent with our documented results. We conclude that in a bank dominated financial system like Taiwan's where firms are heavily bank-dependent, the bank–firm relationship is of crucial importance to the success of financially distressed firms in private debt restructuring.

Extant literature on financial intermediation (see, e.g., Diamond, 1984 and Ramakrishnan and Thakor, 1984) emphasizes the role of banks in generating information, for instance, through screening (Diamond, 1991) and monitoring (Rajan and Winton, 1995). This access to information is especially relevant if the borrowing firm is in financial distress. A bank's evaluation of the borrowers based on their inside information affects the bank's decision to renegotiate the debt or force a firm into bankruptcy (Chemmanur and Fulghieri, 1994). While the borrowing firm encounters financial distress, previous lending relationships with the distressed firm create a significant negative effect on the lending bank (Dahiya et al., 2003). Consequently, when the borrowing firm is in financial distress, the lending banks have two options. First, prudent banking norms immediately require the firm to repay the debt regardless of the possibility of its recovery (i.e., an instant termination of bank relationships). Second, banks are insiders, with significant information advantages. They decide to extensively involve in the firm's private renegotiation and debt restructuring to recover losses (i.e., a continuation of bank relationships). Therefore, bank relationships may or may not benefit distressed corporate borrowers encountering financial distress. Relatively few studies in emerging economies investigate this issue. Thus, this study examines how bank relationships affect the probability of successful private debt restructuring for financially distressed borrowers. Recent research has shown how bank relationships affect private debt restructuring of financially distressed firms. Brunner and Krahnen (2008) used the number of banks as a proxy for bank relationships and observed an extensive involvement of banks in their borrowers’ debt restructuring and private workout activities. Brunner and Krahnen found that the probability of recovery from a distressed situation is negatively related to the number of banks. Couwenberg and Jong (2006) used bank debt as a proxy for the effect of bank relationships. Using this proxy, they studied the private restructuring processes in Dutch distressed firms. They found that bank debt has a significantly positive effect on the likelihood of restructuring success. While these studies show that bank relationships increase the value of distressed firms, bank relationship measures are susceptible to potential weakness, such as the degree of bank relationships measured by a single proxy. Indeed, if a firm requires fewer external funds, it would finance fewer loans with a smaller number of banks. In this situation, there is not a close or strong relationship between bank and firm. Moreover, the Taiwan financial structure is typically a bank-based financial system in which firms tend to be heavily dependent upon bank loans.1 It seems inappropriate to employ a single proxy, the size of the bank debt ratio, for bank relationships because most firms have high bank debt ratios. Hence, in contrast to the previous literature which used only a single proxy for bank relationships, the conclusions of the present research may be robust to the different bank relationship measures. The concept of a “bank relationship” is quite elusive in banking theory. There is no uniformly accepted methodology for measuring the presence and strength of bank relationships (Bharath et al., 2007). If the precise point of the start of a bank relationship is available, researchers often use the length of a relationship as a proxy for its strength (see, e.g. Petersen and Rajan, 1994, Berger and Udell, 1995 and Elsas and Krahnen, 1998). In cases in which this information is not available, the existence of a prior bank relationship is used as a proxy (see, for example, Dahiya et al., 2003, Schenone, 2004 and Bharath et al., 2007). Not having the precise records of bank relationships in the Taiwan banking industry, this present study adopts the existence of a prior bank relationship as a proxy for the presence of bank relationships. Moreover, this study looks at the size of bank relationships and the number of bank relationships by searching the borrower's previous borrowing records. In short, this study simultaneously discusses three measures of bank relationships to examine the effect of the success of private debt restructuring for financially distressed firms. These measures include the existence, size, and number of bank relationships. The early empirical studies mainly have been concerned with the argument of formal bankruptcy procedures and have paid relatively less attention to out-of-court debt restructuring. Jensen (1989) is one of a few works that advocated that private contractual arrangements for resolving default represent a viable and less costly alternative to the legal remedies provided by Chapter 11. Gilson et al. (1990) further examined the determinants of 169 financially distressed firms’ choice between formal bankruptcy and out-of-court restructuring. Gilson et al. found that about half (80 firms) successfully restructured their debt through out-of-court renegotiations and these firms have more intangible assets, a larger percentage of debt owed to banks, and fewer lenders. Moreover, the financial literature has identified firm size (Couwenberg and Jong, 2006), firm age (Demine and Carvalho, 2006), leverage (Brunner and Krahnen, 2008 and Couwenberg and Jong, 2006), and return on assets (Claessens et al., 2003, Couwenberg and Jong, 2006 and Franks and Sussman, 2005) as the critical factors and investigated the effects of firm characteristics upon the probability of firm survival. However, regarding the possible impacts of debt structure on the success of firms’ private restructuring, the extant literature produces mixed results. Financial distress is more likely to be resolved through private renegotiation when both relatively less debt is owed to trade creditors (Gilson et al., 1990) and more is owed to bank lenders (Couwenberg and Jong, 2006 and Gilson et al., 1990). Franks and Sussman (2005) showed that the number and value of collateral over bank debt do not significantly affect the probability of firm survival. Consequently, this study also investigates the impacts of firm characteristics and debt structure upon the success of private debt restructuring. The aim of this study is to investigate the determinants of successful private debt restructuring for financially distressed firms using Taiwan data. In particular, the primary goal of the present research is to examine the effects of bank relationships upon the success of private debt restructuring of distressed firms. This study hypothesizes that bank relationships significantly increase the success of private debt restructuring for financially distressed firms. This hypothesis predicts that stronger bank relationships increase the probability that a distressed firm can successfully restructure its debt through private renegotiation. Debt restructuring seldom begins or ends with a formal public announcement, and outsiders do not generally have a clear picture of a firm's private debt restructuring plan. This makes it difficult for researchers to collect data. This study presents a well-defined beginning and ending date of firm debt restructurings to identify the success or failure of a distressed firm's private debt restructurings without depending on a bank's internal information using a credit rating index. Consequently, this study contributes to the firm's private debt restructuring research by providing a helpful methodology for the relevant studies in the financial market where few data are publicly available. The remainder of the paper is organized as follows. Section 2 describes the data and sample selection. The methodology and empirical results are presented in Section 3. The final section contains the concluding remarks.

This paper investigates the determinants of successful private debt-restructuring pursued by financially distressed Taiwanese firms during the period 1995–2003. Several salient features in this study will shed light on the problem of bank relationships and private debt restructuring. Firstly, this study presents a credit rating index to identify the success or failure of firm private debt restructuring. The proposed methodology provides a potential method for future research in the field of firm private debt restructuring, which frequently is confronted with data impediments. Because bank loans are private instruments, the data relevant to debt restructuring in emerging markets is rarely available to the public. Secondly, in terms of contributions to the literature, this study is one of only a few attempts to carefully document the effects of bank relationships on firm private debt restructuring. Specifically, this study employs three proxies for completely measuring the degree of bank relationships and identifies the various effects of these proxies on the success of private debt restructuring. Results indicate that bank relationships significantly affect the success of firm private debt restructuring. A financially distressed firm with a stronger bank relationship is more likely to successfully restructure its debt. Therefore, the empirical results in this study fully support the hypotheses defined by this study. Empirical results also show that firms with younger age, higher profitability, less severity of distress, more account-payable debt and better macroeconomic conditions exhibit a significantly higher likelihood of successful restructuring. Finally, two supplementary pieces of evidence drawn from an analysis of the credit rating recovery and a duration analysis of the length of time needed for a private debt restructuring simultaneously confirm the findings reported in the logistic regression analysis. In brief, bank–firm relationships are crucial to the success of private debt restructuring undertaken by financially distressed firms, particularly in a bank dominated financial system where firms are heavily bank-dependent as evidenced in Taiwan.