Ownership Structure and Private Debt Restructuring: The Application of Binary Probit and Accelerated-Failure Time Model

Abstract

A debt restructuring scheme has been an ultimate choice for financially distressed firms to meet their obligation covenants. Under the corporate governance practice, investors will exert effort to obtain an optimal method of debt renegotiation to alleviate firms from distress and improve the shareholders’ value. An analysis of factors affecting successful firm private debt restructuring is carried out by adopting several independent variables: the proportion of institutional ownership and managerial ownership within the sample of financially distressed firms that had undertaken debt restructuring between FY 2012 and FY 2018. By running a binary probit regression model, we find that a distressed firm with a higher percentage of institutional ownership has a greater probability of succeeding and surviving through private debt renegotiation. A duration analysis of the length of time for debt restructuring completion is entirely consistent with the documented result in probit regression analysis. A higher proportion of institutional ownership shortens the duration for a firm to successfully restructure its debt. On the other hand, we discover an insignificant result for managerial ownership. We conclude that for financially distressed firms, the role of institutional investors is crucially important for the success of private debt restructuring.

Keyword:Institutional Ownership, Managerial Ownership, Private Debt Restructuring, Financial Distress, Indonesia