Good and bad credit contagion: Evidence from credit default swaps

This study examines the intra-industry information transfer effect of credit events, as captured in the credit default swaps (CDS) and stock markets. Positive correlations across CDS spreads imply that contagion effects dominate, whereas negative correlations indicate competition effects. We find strong evidence of contagion effects for Chapter 11 bankruptcies and competition effects for Chapter 7 bankruptcies. We also introduce a purely unanticipated event, in the form of a large jump in a company's CDS spread, and find that this leads to the strongest evidence of credit contagion across the industry. These results have important implications for the construction of portfolios with credit-sensitive instruments.     

Contagion or Competition: Going Concern Audit Opinions for Real Estate Firms

We examine whether intra–industry information transfers from going–concern audit opinion announcements create contagion or competitive stock price reactions for other real estate firms operating in the same line of business. Using returns from publicly-traded land subdivision/development firms and Real Estate Investment Trusts, we find modest evidence supporting a competitive effect among rival firms as a result of another real estate firm announcing the receipt of a Going Concern Opinion (GCO) from its independent auditors.     

Emerging from Chapter 11 Bankruptcy: Is It Good News or Bad News for Industry Competitors?

A firm under Chapter 11 bankruptcy protection may emerge from bankruptcy in a more advantageous competitive position within its industry to the detriment of their industry rivals. Using a sample of 264 firms that emerged from Chapter 11 bankruptcy during the period 1999-2006, I find that its industry competitors demonstrate negative postemergence long-term equity returns and deteriorating financial performance. Additional tests indicate that this outcome is less likely due to overall industry distress. Competitors tend to be more adversely affected if they are in more concentrated industries, if they have lower credit quality, when a more efficient firm emerges, and when the duration of bankruptcy is longer. This study suggests a need to reconsider Chapter 11's role in promoting competition and allocation of resources given its negative externalities on industry competitors.     

Intra-lndustry Effects of Corporate Capital Investment Announcements

We examine how announcements of corporate capital investments by one firm affect the stock prices of its competitors. We find that on average, rivals experience a signifi cantly negative valuation effect. The results suggest that for the sample as a whole, the competitive effect dominates the contagion effect. We further examine various factors that could potentially explain the heterogeneous intra-industry effects of capital investment announcements. We find that rivals' share prices are more adversely affected when the announcer experiences a higher announcement effect or is the first mover in the industry. We also show that rivals experience a greater wealth loss when they have poorer investment opportunities or higher financial leverage.     

The competitive effects of S&P 500 Index revisions

Firms added to the S&P 500 Index gain a competitive advantage over their non‐S&P 500 industry competitors. They experience positive stock valuation effects at the expense of competitors. The inclusion is associated with both reductions in financial constraints and the cost of equity and increases in capital investment for the newly added firms. When the increase in capital investment is greater, they gain more market share and enjoy better valuation effects. Rivals’ share price responses are negatively related to the announcement effect of the newly added firm. Deletions from the index, however, do not have symmetric effects.     

Strategic Bankruptcies and Price Reactions to Bankruptcy Filings

This study investigates whether the stock market differentiates between firms that file bankruptcy petitions for strategic reasons and firms that file bankruptcy petitions for financial reasons. We perform both univariate and regression tests on a sample of 245 firms that filed Chapter 11 bankruptcy petitions between 1981 and 1996. After controlling for bankruptcy outcome, probability of bankruptcy, firm financial condition, and firm size, we find that, in the period around bankruptcy filing, firms that file bankruptcy petitions for financial reasons have significantly larger stock price declines than firms that file bankruptcy petitions for strategic reasons.     

CEO turnover and bankrupt firms’ emergence

This paper examines whether CEO turnover within a bankrupt firm predicts the firm's likelihood to reemerge from bankruptcy proceedings as a reorganized entity. Using 836 bankruptcy cases filed under Chapter 11 of the United States Bankruptcy Code from 1989 through 2016, we show that firms that undergo CEO turnover are significantly more likely to emerge from Chapter 11 proceedings. We conduct further analyses to examine the potential mechanisms through which CEO turnover is linked to a firm's chance of emergence. Consistent with the perspective that CEO turnover constitutes an observable event that can signal creditor support, we find that CEO turnover in bankrupt firms is positively associated with debtor-in-possession financing. Additionally, there is a significant increase in managerial quality post-turnover. Further, we document that the predictive power of CEO turnover is stronger in bankruptcy cases with greater uncertainty, such as in free-fall bankruptcies, where there is less preexisting agreement between the firm and its creditors. Overall, our findings provide valuable insight into external investors and stakeholder groups, whose interests are significantly impacted by corporate bankruptcies.     

The Chinese Stock Dividend Puzzle

In this paper, we examine the announcement effects of dividends with an emphasis on stock dividends in China's capital market. We find that dividend-paying stocks exhibit significantly positive abnormal returns while non-dividend-paying stocks show a negative announcement effect. Further, we document that the cumulative abnormal returns for pure stock dividends and combined dividends are the main drivers of this announcement effect. In contrast, pure cash dividend stocks experience no significant price run-up before announcement. The significant announcement effect of stock dividends is robust to controlling the earnings surprise effect. We offer some discussion of the possible explanations.     

Financial Misrepresentation and Its Impact on Rivals

This paper examines how the announcement of an accusation of fraudulent financial misrepresentation affects industry rivals of the accused firm. Consistent with the importance of the industry competition effect, we find that rivals in less competitive industries benefit from the event. However, in competitive industries, the information spillover effect dominates the competition effect, resulting in negative returns to rival shareholders following the event. The spillover effect increases in importance with the severity of the accusation and is more important for opaque rivals and for rivals that had positive stock price reactions to past positive earnings surprises of the accused firm.     

资本市场国际影响力提升效应研究——来自A股纳入明晟(MSCI)新兴市场指数的证据

2018年5月15日,首批纳入明晟(MSCI)新兴市场指数的A股股票名单正式公布。我们发现,被纳入MSCI的股票(标的股票)在公告日前后有显著为正的累计超额收益。相较于主要特征相似的匹配股票,标的股票纳入MSCI后的分析师评级有显著提升。进一步研究表明,在公告日前后融资(融券)交易量显著上升(下降),而换手率没有明显变化,并且净融资交易与公告效应显著正相关。本文的发现表明,A股纳入MSCI这一事件具有明显的信息含量,传递了有关企业前景的正面信息,并促使本地市场聪明投资者进行更活跃的交易,这对促进价格发现、促成价值投资具有一定的推动作用。     

Good News for Value Stocks: Further Evidence on Market Efficiency

This article examines the hypothesis that the superior return to so-called value stocks is the result of expectational errors made by investors. We study stock price reactions around earnings announcements for value and glamour stocks over a 5-year period after portfolio formation. The announcement returns suggest that a significant portion of the return difference between value and glamour stocks is attributable to earnings surprises that are systematically more positive for value stocks. The evidence is inconsistent with a risk-based explanation for the return differential.     

Does the response of competitors to privatization announcements reflect competitive or industry-wide information effects? International evidence

We examine the stock price reaction of rival firms to the announcement of the privatization of their industry counterparts to infer information about the intra-industry effects of privatization. We find that the rival firms reacted negatively to the privatization announcements, suggesting that the announcement effects reflect competitive rather than positive industry effects. The reaction is stronger for industry counterparts in low economic freedom countries than those in high economic freedom countries. Interestingly, we also find that full privatization announcements generate larger negative abnormal returns for rival firms than partial privatization announcements where the privatized firm gains only partial autonomy from the government. In this regard, we find that, as the proportion of government ownership reduces, subsequent partial privatization announcement elicits stronger market reaction from rival firms. The negative abnormal returns earned by shareholders of rival firms are not due to price pressure and portfolio rebalancing effects resulting from index composition changes. We conclude that the negative effects documented for the rival firms reflect investors' concern about the potential competitive effects resulting from privatization of the state enterprise.     

THE INTRA-INDUSTRY EFFECTS OF OPEN MARKET SHARE REPURCHASES: CONTAGION OR COMPETITIVE?

We examine the extent to which announcements of open market share repurchase programs affect the valuation of competing firms in the same industry. On average, although firms announcing open market share repurchase programs experience a significantly positive stock price reaction at announcement, portfolios of rival firms in the same industry experience a significant and contemporaneous negative stock price reaction. This suggests that perceived changes in the competitive positions of the repurchasing firms occur at the expense of rival firms and dominate any signals of favorable industry conditions. Thus, the competitive intra-industry effects of open market repurchases outweigh any contagion effects. In addition, cross-sectional tests indicate that these competitive effects are more pronounced in industries characterized by a lower degree of competition and less correlation between the stock returns of the repurchasing firm and its rivals.     

Bankruptcy spillover effects on strategic alliance partners

This paper examines whether a party to a strategic alliance or joint venture suffers from spillover effects when the other partner files for bankruptcy. We find that the non-bankrupt strategic alliance partners, on average, experience a negative stock price reaction around their partner firm's bankruptcy filing announcement. This negative effect is strongest for longer partnerships and those with higher returns at the announcement of the initial alliance formation. Furthermore, horizontal alliance firms in declining industries have lower returns, indicating that industry conditions can exacerbate expected problems for the non-bankrupt firm. Non-bankrupt partners also experience drops in profit margins and investment levels in the subsequent two years with the worst performance concentrated among the longer-term agreements. There is very little impact on the returns or performance for joint venture partners, which suggests that these agreements are more insulating for the partner firm.     

The Bankruptcy Decision and Debt Contract Renegotiations

We consider the bankruptcy law and workout practices in the United States and model bankruptcy as a strategic decision. We analyze a firm's choice between liquidation under Chapter 7, renegotiation of the debt contract in a workout, and reorganization under Chapter 11 of the bankruptcy code. Our premise is that a financially distressed firm chooses its action in order to minimize the loss in value caused by the well-known over- and under-investment problems. We show that the firm initiates a workout when it faces under-investment, and commences Chapter 11 when it faces over-investment. Some of the results are: (i) in default, total firm value and equity value increase upon the announcement of a workout and decrease upon the announcement of Chapter 11; (ii) firms with shorter maturity of debt are more likely to reorganize in a workout; (iii) among the firms that renegotiate their debt contract, the proportion of firms entering Chapter 11 is higher for firms in mature industries than for firms in growth industries.     

A Brief Review of Catastrophe Theory and a Test in a Corporate Failure Context

Catastrophe theory (CT) is a mathematical theory that attempts to describe a system exhibiting discontinuous behavior under continuous stimuli. Although CT has been used to describe corporate bankruptcy, this is an application that has not been tested. This paper reviews CT and provides such a test. We construct a time series of stock returns on companies that have filed for Chapter 11. Under certain, frequently occurring conditions, CT would predict a structural shift in firm stock returns as the data of filing is approached. Results confirm that such a shift does occur and in a way consistent with the CT prediction. Our findings both support the use of CT to describe corporate bankruptcy and raise questions about some techniques frequently used to study bankruptcies.     

Orange County Bankruptcy: Financial Contagion in the Municipal Bond and Bank Equity Markets

We examine the spillover wealth effects of the Orange County, California bankruptcy announcement in December 1994 on municipal bonds, municipal bond funds, and bank stocks. This bankruptcy is prominent because of unprecedented losses and because it was caused by a highly leveraged derivatives strategy rather than a shortage of tax revenues and excess spending. We find contagion in the bond market with significantly negative abnormal returns for municipal bond funds without direct exposure to Orange County and for non‐Orange County municipal bonds. In addition, our findings suggest the contagion spills over to the common stocks of investment and commercial banks that deal in or use derivatives; however, the equities of banks unexposed to derivatives are not affected.     

Inter-firm linkages and the wealth effects of financial distress along the supply chain

Extant research examines the extent to which bankruptcy has intra-industry valuation consequences. This study broadens the investigation by examining the wealth effects of distress and bankruptcy filing for suppliers and customers of filing firms. On average, important wealth effects occur prior to and at bankruptcy filings and extend beyond industry competitors along the supply chain. Specifically, distress related to bankruptcy filings is associated with negative and significant stock price effects for suppliers. Supplier wealth effects are more negative when intra-industry contagion is more severe. We also investigate the importance of industry structure, specialized product nature, and leverage on supply chain effects.     

The persistent effects of a false news shock

In September 2008, a six-year-old article about the 2002 bankruptcy of United Airlines' parent company resurfaced on the Internet and was mistakenly believed to be reporting a new bankruptcy filing by the company. This episode caused the company's stock price to drop by as much as 76% in just a few minutes, before NASDAQ halted trading. After the “news” had been identified as false, the stock price rebounded, but still ended the day 11.2% below the previous close. We explore this natural experiment by using a simple asset-pricing model to study the aftermath of this false news shock. We find that, after three trading sessions, the company's stock was still trading below the two-standard-deviation band implied by the model and that it returned to within one standard deviation only during the sixth trading session. On the seventh day after the episode, the stock was trading at the level predicted by the asset-pricing model. We investigate several potential explanations for this finding, but fail to find empirical evidence supporting any of them. We also document that the false news shock had a persistent negative effect on the stock prices of other major airline companies. This is consistent with the view that contagion effects would have dominated competitive effects had the bankruptcy actually taken place.     

Effects of Preferred Stock Re-rating on Common Stock Prices: Further Evidence

This study examines the price reactions of common stocks to changes in preferred stock ratings, with focuses on firms with less information available in the market as well as on firms with a relatively larger proportion of preferred stock financing. Emphasis on differential information and the relative size of preferred stocks across firms provide a more powerful test of the effect of rating changes on stock prices. Contrary to previous studies that report no price effect on common stocks due to preferred stock re-ratings, these results show that for low-information firms and for firms with a larger proportion of preferred stocks in their capital structure, a preferred stock rating downgrade exerts significant negative price effect on common stocks during the two-day announcement period. Our findings also have implications for future studies of other firm-specific events such as security offerings, stock repurchases, and convertible calls.