We investigate debt restructurings in Germany for a sample of 116 financially distressed companies. About half of the firms succeed in restructuring their debt in a workout while the others file for bankruptcy. Our evidence suggests that firms which have higher leverage, owe more debt to banks, and exhibit higher going concern values are more likely to conduct a workout. Bankruptcy is more likely for firms with deficient lender coordination and a high fraction of collateralized debt. An analysis of stock returns suggests that the market uses similar information to predict workouts. 84% of the bankrupt firms were ultimately liquidated.

We empirically investigate the effect of financial distress on corporate ownership and control. Our analysis is based on a panel of 267 German firms that suffered from repeated interest coverage shortfalls between 1996 and 2004. We track each firm’s development over the distress cycle with particular attention to corporate ownership, restructuring, and management turnover. We find a significant decrease in ownership concentration. Private investors gradually give up their dominating role and thereby cease to be an effective source of managerial control. By contrast, ownership representation by banks and outside investors almost doubles. Shareholdings by executive and non-executive directors also substantially increase but have no effect on managerial tenure. Forced management turnover is mostly initiated by outside investors and banks and often occurs subsequent to debt restructurings, block investments, and takeovers.