Para Combate de Incendios deberá proveerse Cualquier

I address my research hypothesis by examining how institutional investors’ stockholdings change over time. Institutional ownership is used as a proxy for this variable (e.g., Nofsinger and Sias, 1999; Chen, Jegadeesh and Wermers, 2000; Ke and Ramalingegowda, 2005) and is computed as follows: , , , i t i t i t

Shares held

Inst

Shares outstanding

=

(5.1)

where

Shares held

_{i t,} is the number of shares of firm

i

held by institutional investors at time

t

and

Shares outstanding

_{i t,} is firm

i

’s number of outstanding shares at time

t

. Working with

equation (5.1) requires a strict definition for time

t

. I overcome this issue by identifying what I term here as quarter 0. For firm

i

, this quarter is simply the first quarter where institutions report their holdings about the firm after its bankruptcy date.79 _{Once quarter 0 is found, it is} possible to determine other quarters just like in a standard event-study. I compute equation (5.1) for a total of 17 quarters centred on quarter 0, which is sufficient to understand how institutional investors deal with corporate bankruptcy.

5.1.5 Results

Table 5.1 summarizes my results. I find that in event-quarter -8 institutions own, on average, 25 percent of my bankrupt firms’ shares (median holdings are 20 percent). Four quarters latter, they own, on average, 21 percent of the debtors’ shares (median holdings are 16 percent). Once Chapter 11 becomes effective (quarter 0), institutional investors own, on average, only 12 percent of these companies’ shares, a pattern that remains largely unchanged for another four post-event quarters. Importantly, institutions’ median holdings right after Chapter 11 are 8 percent, decreasing to 6 percent four quarters latter.

I additionally conduct a t-test and a Wilcoxon-Mann-Whitney test to verify if the mean and median percentage of bankrupt firms’ shares held by institutional investors is statistically different between quarter 0 and quarters -8, -4, 4 and 8. I am unable to find any statistically significant difference between quarters 0 and 4 (the p-value of the t-test and the Wilcoxon- Mann-Whitney test is 0.9479 and 0.4070, respectively). A completely opposite result emerges when considering quarters -8 and 0 and -4 and 0: in this case, both the parametric and non- parametric tests are significant at the one percent level. For quarters 0 and 8, results are mixed since I find a p-value of 0.0206 (0.1761) for the t-test (Wilcoxon-Mann-Whitney test).

Taken together, these results suggest that institutions change significantly their stockholdings in bankrupt firms twice in the period under scrutiny. The first, occurring around the Chapter 11 date, leads to a massive reduction in the debtors’ equity structure. Five quarters latter, this initial reaction is partially reversed and institutions increase, albeit slightly, the number of shares of failed companies in their portfolios.

Previous research shows that institutional investors dislike small firms’ stock (see section 5.1.1) and, as such, the patterns described above may not be specific to my sample of bankrupt firms. Table 5.1 suggests otherwise. In event-quarter -8, institutions own on average 24 percent of the shares of my control firms (median holdings are 19 percent), a figure that is consistent with that of the bankrupt companies. Not surprisingly, for this particular quarter, both the t-test and

the Wilcoxon-Mann-Witney test are not significant at normal levels. This changes four quarters latter. In event-quarter -4, the mean and median difference between sample and benchmark firms is now around five percent and significant at normal levels. Such difference increases with time and, in quarter 0, becomes very clear. In this quarter, institutions own, on average, 23 percent of control companies’ shares (18 percent in median terms) and only 12 percent of the bankrupt firms (8 percent in median terms). The mean and median difference between groups is significant at better than the one percent level, with the same pattern applying to the following eight quarters of available data.80 _{In face of this evidence, I reject the null hypothesis} under analysis here (H2).

80 _{In untabulated results, I rerun the analysis accounting for the fact that some of my sample firms are delisted after} filing for bankruptcy. In this alternative test, benchmark firms are deleted when the bankrupt firm they are paired with is delisted. Results are very similar to those reported here.

Table 5.1

Institutional investors’ stockholding of bankrupt companies

This table presents institutional stockholdings for my population of 351 non-finance, non-utility firms listed on the NYSE, AMEX or NASDAQ that filed for Chapter 11 between 01.10.1979 and 17.10.2005 and that remained listed on a major US stock exchange. Information about institutional stockholdings for a control sample based on size and book-to-market is also provided. Specifically, for each sample company, I identify all CRPS firms with a market capitalization between 70 and 130 percent of its equity market value. The respective control firm is then selected as that firm with book-to-market closest to that of the sample firm. Below, institutional ownership is computed as Inst_{i t,} =Shares held_{i t,} Shares outstanding_{i t,} , where

,

i t

Shares held is the number of shares of firm i held by the institutional investors at the end of event-

quarter t and Shares outstanding is firm _{i t,} i’s outstanding shares at the end of event-quarter t. Event-

quarter 0 is defined as the first quarter where institutions report their holdings about the firm (sample or matched) after the bankruptcy date. The last two columns report the two-tailed significance level from a t- test and a Wilcoxon-Man-Whitney test for the difference in means and medians, respectively. N reports the number of companies with available information to compute Inst in event-quarter_{i t,} t.

Quarter Mean Median N Mean Median N Mean Median

-8 24.4% 20.1% 263 24.2% 19.4% 323 0.9192 0.5043 -7 24.1% 20.1% 274 23.9% 19.5% 324 0.9348 0.6282 -6 22.5% 17.6% 282 24.4% 20.0% 326 0.2699 0.6156 -5 21.9% 17.1% 288 24.1% 19.9% 330 0.1725 0.4696 -4 20.6% 15.5% 299 25.4% 20.4% 327 0.0042 0.0283 -3 19.6% 14.3% 303 24.1% 19.4% 330 0.0036 0.0267 -2 18.0% 12.7% 306 24.0% 19.7% 326 <0.0001 0.0010 -1 16.1% 10.7% 310 23.4% 19.5% 330 <0.0001 <0.0001 0 11.6% 7.9% 306 23.2% 17.9% 333 <0.0001 <0.0001 1 11.0% 6.7% 264 23.4% 17.5% 333 <0.0001 <0.0001 2 11.1% 6.1% 229 23.8% 17.5% 331 <0.0001 <0.0001 3 11.2% 5.9% 198 22.9% 16.5% 335 <0.0001 <0.0001 4 11.7% 5.7% 189 22.7% 16.4% 335 <0.0001 <0.0001 5 12.8% 6.0% 173 23.6% 18.0% 326 <0.0001 <0.0001 6 13.6% 6.1% 168 24.2% 19.2% 316 <0.0001 <0.0001 7 14.0% 5.6% 160 25.0% 18.8% 308 <0.0001 <0.0001 8 15.8% 6.2% 148 24.9% 18.7% 301 <0.0001 <0.0001

5.1.6 Summary and limitations

This section attempts to explore the role of noise traders in the pricing of bankrupt firms. Unfortunately, data about these market participants’ holdings is not readily available, a problem that I overcome by investigating how institutional investors’ stockholdings change around the bankruptcy date. Two main ideas emerge from my analysis: 1) institutions steadily sell debtors’ stock as Chapter 11 approaches; 2) once bankruptcy is underway, the participation of institutional investors in the market for bankrupt firms is, at best, marginal.

My results are similar to those reported by Kausar, Taffler and Tan (2008) and suggest that institutional investors are less exposed to particular behavioural biases, which allows them to deal more rationally with the catastrophic event at hand. My findings also help complement previous research by Seyhun and Bradley (1997) and Ma (2001), who study the behaviour of bankrupt firms’ insiders. Both papers show that these market participants engage in significant sales of their firm’s stock in the months and even years preceding the event date. Such strategy allows insiders to avoid significant capital losses and is very similar to that document now for institutional investors. The research of Seyhun and Bradley (1997) and Ma (2001) thus suggest that insiders, who are by definition individual investors with superior (privileged) information about their companies, also have only a minor participation in the market of bankrupt firms.

Another way to read this section’s main result is that noise traders control the market for bankrupt firms’ stock. To be precise, in the typical case, individual investors own an average of around 90 percent of the stock while the company is undergoing its Chapter 11 reorganization. As such, they are likely to be responsible for setting the debtors’ stock price or, in the words of Hand (1990) and Thaler (1999), noise traders are the marginal investor in this particular market. Accordingly, it seems that the anomaly documented in the previous chapters may be the result of a substantial number of traders making their investment decisions based on sentiment and not on information. In effect, it is commonly accepted that noise traders are particularly vulnerable to psychological biases that impair their ability to make rational investment decisions (e.g., Shiller, 1984; Shefrin and Statman, 1985; Shleifer and Summers,

1990 and Lakonishok, Shleifer and Vishny, 1994). I would argue that this problem is even more crucial in a setting where information is scarce (e.g., Espahbodi, Dugar and Tehranian, 2001; Clarke et al, 2006) and valuation is difficult (Gilson, 1995; Gilson, Hotchkiss and Ruback, 2000). In a nutshell, in line with section 2.4.2.1, my results provide evidence in favour of the story that irrational reasons explain why a large number of individual investors trade on bankrupt firms’ stock, which may lead to the incorrect pricing of this security.

There is, however, an important shortcoming affecting the conclusions presented above. In effect, some institutional investors are particularly interested in distressed companies’ securities. For instance, vulture funds seem to be predominantly drawn to this market (Rosenberg, 2000; Lhabitant, 2006). These funds are usually financial organizations specialized in buying securities in distressed environments, such as high-yield bonds in or near default or equities that are in or near bankruptcy. I tried to investigate the role of these market participants in the pricing of my sample companies but, sadly, the typology of institutional investors employed by CDA/Spectrum is not well suited for addressing this issue. In an attempt to deal with this problem, I contacted the Institutional Investor Magazine to see if they had any information that I could use in my research. Unfortunately, I was not able to obtain any data from them. I also got in touch with Professors Edith Hotchkiss and Robert Mooradian, who in 1997 co-authored a paper analysing the role of vulture investors in the governance and reorganization of a sample of 288 firms that defaulted on their public debt. The idea was to gather information on the activities of potential vulture investors involved in the Chapter 11 proceedings of my sample firms. I did not have much success either. This creates an opportunity that may be explored in further research.

5.2 Arbitrage implementation costs and the mispricing of bankrupt firms

In document HIGIENE INDUSTRIAL RIESGOS QUIMICOS.doc (página 103-106)