Distress Resolution through New Block Formation: Implications for Ownership Concentration*

Abstract

This study examines distress resolution under concentrated equity ownership and concentrated bank debt. Using a large sample of Korean financially distressed firms, I find that distress resolution is more likely when private placements of new equities are accompanied by a change in control. Control transfers in which new blocks are created through equity capital injection contribute to operational efficiency and long-term performance. These findings suggest that equity capital injection and monitoring by new blockholders are essential for distress resolution under poor investor protection, which further explains why concentrated ownership may persist under such an environment.