Market power, internal and external monitoring, and firm distress in the Chinese market

Abstract

This research revealed the factors that cause firm distress in the Chinese market. The stock exchange–listed firm samples are classified as moderate or severe distressed firms if they receive a special treatment warning from stock exchanges due to continuous negative net loss or are suffering from negative equities. By applying ordinary least square and logit regressions to the 2015–2022 data sample, the results showed that market power and internal and external monitoring significantly affect the likelihood of firm distress. Interestingly, debt only negatively affects a firm's earnings, has no impact on moderate firm distress, and reduces the likelihood of falling into severe distress. State-owned enterprises (SOEs) receive government support and are therefore less likely to be distressed, in contrast to family-owned firms. The recovery results confirmed that SOEs are easier to recover that family-owned firms. The ability to repay debt increases credibility and is a good signal of recovery. We differentiated from past discussions that focused on earning management and business failure. Our research contributes to the literature by analyzing firm distress and recovery from market power and monitoring, which are not well discussed with observable evidence. These findings could be helpful for both corporate and regulatory policy decision-making.

Keywords

• firm distress
• market power
• debt
• monitor
• state-owned enterprise
• family-owned firms