This paper explores the idea that financial distress is costly because
free-rider problems and information asymmetries make it difficult for firms
to renegotiate with their creditors in times of distress. We present
evidence consistent with this view by showing Japanese firms with financial
structures in which free-rider and information problems are likely to be
small perform better than other firms in industrial groups-those with close
financial relationships to their banks, suppliers, and customers-invest more
and sell more after the onset of distress than non-qroup firms. Moreover,
firms that are not group members, but nevertheless have stronq ties to a main
bank also invest and sell more than firms without stronq bank ties.
*Published:
Journal of Financial Economics Volume 27 1990, pp. 67-88 September 1990
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