Financial distress resolution in China – two case studies

The purpose of this paper is to examine two contrasting financially distressed companies in China and their restructuring strategies. Chinese firms are selected as providing a context where bankruptcy law is in its infancy and where the state is still heavily involved as a shareholder. As a result, the process of distressed company restructuring is likely to differ markedly from that observed in developed economies.

The paper adopts a case study methodology to explore on an in‐depth basis the features of the distress resolution process in the Chinese institutional context and to investigate how it differs from the process in more developed economies. The paper analyses the firms' accounting‐based performance to understand the nature of their difficulties. It then examines the complex restructuring procedures initiated and uses an event study approach to evaluate the stock market's reaction to these strategies.

The distinguishing features of the Chinese restructuring process are as follows. First, the assets of distressed firms are sometimes transferred without payment being made in return. Second, social considerations play a role, in particular the state's need to maintain employment levels or ensure the funding of redundancy payments. Finally, firms can remain in severe financial distress for extended periods of time; possible reasons for this are explored in the paper.

The existing distress literature focuses on developed economies such as the USA and the UK. The paper provides an in‐depth understanding of the special features of the Chinese situation, including the role of government and other more commercially driven shareholders; the subsequent importance of social policy issues; the protracted and complex nature of the restructurings; and the frequent use of mergers, share transfers, asset swaps and asset sales.