Ownership structure and firm value for firms in financial distress

We provide grounds for expecting ownership structure to affect valuation differently for firms in poor financial condition than in the general case. For all firms in poor financial condition, the potential loss of employment and perquisites reduces the effect of insider ownership on managerial decisionmaking. For large blockholder and institutional ownership, we identify two new mechanisms by which the structure of equity ownership affects firm value.; For firms that are reorganizing privately, the exchange effect accounts for the extent to which institutions are willing to hold equity. Institutional ownership is a positive sign of the firm's financial condition, due to access to relatively more accurate information on the firm's financial condition. The extent to which firms must rely on non-institutional blockholders to affect exchange offers is a negative sign of the firm's financial condition. The voting effect predicts a negative effect of large blockholder and institutional ownership on firm value, most likely at lower levels of ownership. For firms in public reorganization, the voting effect accounts for the fact that blockholders and financial institutions may care more about their claims than maximizing total firm value.; We obtain a sample of firms in poor financial condition and regress firm value on the percent ownership held by insiders, large blockholders, and institutions. For firms that are financially distressed, whether they are in private reorganization or public reorganization, insider ownership does not play a significant role in affecting firm value, as predicted. For firms in private reorganization, we find that large blockholder and institutional ownership have a significant curvilinear effect on firm value, consistent with our hypotheses. In particular, the positive efficient and active monitoring effects of large blockholder ownership on firm value appear to be offset by the negative exchange effect at higher levels of ownership. For institutional ownership, the positive efficient and active monitoring and exchange effects at higher levels of ownership appear to be offset by the negative conflict-of-interest effect at lower levels of ownership.; For firms in public reorganization, we obtain mixed results. Institutional ownership does not appear to play a significant role in affecting firm value, though large blockholder ownership has a significant curvilinear effect on firm value that is consistent with our hypothesized signs. For large blockholder ownership, it appears that the negative voting effect dominates the positive efficient and active monitoring effects at lower levels of ownership, as expected.