Managers of Financially Distressed Firms: Villains or Scapegoats?

Posted: 6 Sep 1999

See all articles by Naveen Khanna

Naveen Khanna

Michigan State University

Annette B. Poulsen

University of Georgia - Department of Banking and Finance; European Corporate Governance Institute (ECGI)

Date Written: November 1994

Abstract

In this paper, we provide evidence concerning the extent to which managers are to blame when their firms become bankrupt. We study a sample of firms that end up in severe financial distress to determine the actions taken by firms' managers as their financial positions worsen. We compare the sample of firms that eventually experience server financial distress (fling for Chapter 11 bankruptcy protection) with a control sample of firms that performed better. We suggest that the comparison provides evidence on the way managers act as their firms sink into financial trouble and the extent to which financial distress is the result of incompetence or excessively self-serving managerial decisions or due to factors outside of management's control. We find that managers of Chapter 11 firms and the control forms make very similar decisions and that, on average, neither set of managers are perceived to be taking value- reducing actions. We also find that when managers are replaced in the firms that eventually file for Chapter 11 protection, the market does not respond positively. These findings support the idea that financial distress is due to conditions outside of the control of managers or that the managers are serving as scapegoats.

JEL Classification: G30

Suggested Citation

Khanna, Naveen and Poulsen, Annette B., Managers of Financially Distressed Firms: Villains or Scapegoats? (November 1994). Available at SSRN: https://ssrn.com/abstract=6181

Naveen Khanna

Michigan State University ( email )

East Lansing, MI 48824-1121
United States
517-353-1853 (Phone)
517-432-1080 (Fax)

Annette B. Poulsen (Contact Author)

University of Georgia - Department of Banking and Finance ( email )

Terry College of Business
Department of Finance
Athens, GA 30602-6253
United States
706-542-4450 (Phone)

HOME PAGE: http://www.terry.uga.edu/directory/profile/apoulsen/

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

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