Bankruptcy and Institutions: Theory and Empirical Evidence from Korea and the United States

Using a simple z-score bankruptcy model, this article explores the relationship between bankruptcy threshold and institutions. The z-score threshold for bankruptcy is found to be higher in countries with stronger institutions. To test this claim, a cross-section data set of 86 Korean firms and 60 US firms from 1991 to 2001, extracted from a panel data set, is used. The empirical finding that the z-score bankruptcy threshold in the United States (which has better quality of institutions than does Korea) is higher than that in Korea is consistent with the prediction of the model. Additionally, having examined bankruptcy laws of the two countries, it is found that filing a petition for bankruptcy is easier and debtors rights are better protected in the United States than in Korea, which suggests that the bankruptcy laws of Korea and the United States may be partially responsible for the difference in the z-score threshold for bankruptcy.     

The Impact of Receiving Debtor-in-Possession Financing on the Probability of Successful Emergence and Time Spent Under Chapter 11 Bankruptcy

The ability to obtain financing is a critical element in attempting to successfully reorganise a firm which has declared Chapter 11 bankruptcy. Debtor-in-possession (DIP) financing has become an increasingly popular method in recent years. This paper examines whether receiving DIP financing is related to successful reorganisations and a shortened duration under Chapter 11 bankruptcy proceedings. This study finds that there is an increase in realised returns to equity at the announcement of DIP loan agreements which is positive and statistically significant. It is also found that DIP-financed firms have a reduced probability of liquidation, and shorter time spent under bankruptcy proceedings.     

Forecasting Corporate Bankruptcy: Optimizing the Performance of the Mixed Logit Model

In recent studies, Jones and Hensher (2004 , 2005) provide an illustration of the usefulness of advanced probability modelling in the prediction of corporate bankruptcies, insolvencies and takeovers. Mixed logit (or random parameter logit) is the most general of these models and appears to have the greatest promise in terms of underlying behavioural realism, desirable econometric properties and overall predictive performance. It suggests a number of empirical considerations relevant to harnessing the maximum potential from this new model (as well as avoiding some of the more obvious pitfalls associated with its use). Using a three-state failure model, the unconditional triangular distribution for random parameters offers the best population-level predictive performance on a hold-out sample. Further, the optimal performance for a mixed logit model arises when a weighted exogenous sample maximum likelihood (WESML) technique is applied in model estimation. Finally, we suggest an approach for testing the stability of mixed logit models by re-estimating a selected model using varying numbers of Halton intelligent draws. Our results have broad application to users seeking to apply more accurate and reliable forecasting methodologies to explain and predict sources of firm financial distress better.     

A Re–examination of the Effectiveness of the Bankruptcy Process

As an increasing number of companies go bankrupt, society grows concerned with the process's efficacy. In contrast to previous research, we find that relatively healthy companies emerge from bankruptcy as evidenced by their operating and equity performance post bankruptcy. While we find a substantial degree of variation in the forecast accuracy of sales, EBIT and net income, we find that forecast errors are not statistically significant and are smaller than had been thought. We provide evidence to support the argument that the economy's health affects operating and equity outcomes post bankruptcy.     

企业破产中的法理思考

新的企业破产法应当正确对待金融行业在市场中的主体地位,发挥企业破产法在整合全社会经济运行当中的规范作用,减少政府对国有企业破产的干预。同时,法律应当在微观经济中加强对债权人利益的保护。     

The Limitations of Bankruptcy Prediction Models: Some Cautions for the Researcher

The purpose of this study is to demonstrate potential problems associated with the use of bankruptcy prediction models in current research. The tests in this study demonstrate the problems that may arise when bankruptcy prediction models are inappropriately applied. This analysis evaluated the Zmijewski (1984) and Ohlson (1980) models using time periods, industries, and financial distress situations other than those used to originally develop the models. The findings indicated that both models were sensitive to time periods. That is, the accuracy of the models declined when applied to time periods different from those used to develop the models. The findings also suggest that the accuracy of each model continues to decline moving from the 1988–1991 to the 1992–1999 sample period. Additionally, Ohlson's (Zmijewski's) model was (was not) sensitive to industry classifications. The findings of this study also suggest that the Ohlson and Zmijewski models are not sensitive to financial distress situations other than those used to develop the models. Thus, the models appear to be more generally useful for predicting financial distress, not just bankruptcy.In sum, the results of this study suggest that researchers should use bankruptcy prediction models cautiously. Applying the models to time periods and industries other than those used to develop the models may result in a significant decline in the models' accuracies. Additionally, some bankruptcy prediction models may be more appropriate for evaluating various forms of financial distress as opposed to just bankruptcy. To avoid erroneous applications of bankruptcy prediction models in the future, it is necessary for researchers not only to understand the uses of prediction models, but also to understand the limitations of the models.     

Earnings Retention as a Specification Mechanism in Logistic Bankruptcy Models: A Test of the Free Cash Flow Theory

This paper explores the applicability of as a specification mechanism to improve forecasting methods in corporate bankruptcy. The study combines lessons from Jensen's Free Cash Flow Theory with a logisitic model of bankruptcy to improve forecasting accuracy. The model uses data from the Indian textile industry to show that data classification based on investment opportunities is yet another way of improving precision. The study also re-examines the Free Cash Flow Theory and concludes that in applying it to a bankruptcy scenario, its initial findings regarding retention policy hold true; that is, low growth firms should retain less of their earnings than their high growth counterparts.     

《中华人民共和国企业破产法》对商业银行债权的影响

在我国经济市场化不断深入的今天,法制建设正在逐步加强,利用法律调整经济关系,维护经济主体的正当权益,已成为市场经济健康发展的重要制度保障。因此,加强对法律的研究,增强商业银行法律意识,使法律成为银行规避风险、稳定健康发展的重要保障,具有十分重要的意义。本文研究了新中国破产法的诞生及存在的问题,分析实施破产法18年来商业银行债权受到的影响及其实施过程中存在的问题;探讨了即将出台的新《破产法》草案存在的问题及可能对商业银行债权带来的影响,并对新《破产法》草案存在的问题提出改进意见,同时对商业银行依法经营,防范可能的风险提出建议。     

Determinants and Value of Enterprise Risk Management: Empirical Evidence From the Literature

The development of an enterprise risk management (ERM) program enables companies to manage corporate risks in a holistic manner as opposed to the silo‐based perspective in traditional risk management frameworks. One main question in this regard is what factors drive the implementation of an ERM system in companies and whether ERM programs can actually create value once implemented. This article addresses these questions by conducting a comparative assessment of empirical evidence from the literature regarding the determinants of ERM and its value once implemented. In doing so we are able to illustrate differences in model specifications and the underlying data. Our literature study shows that particularly the company size and the level of institutional ownership are significantly positively related to the implementation of ERM in most empirical studies and, furthermore, that ERM generally has a (significant) positive impact on corporate value and performance (to a different extent and depending on the focus of the studies). However, geographic and/or industrial restrictions regarding the underlying data sets partly limit the generalization of the empirical results.     

The Determinants of Private Debt Holdings: Evidence From the Life Insurance Industry

Life insurers hold the majority of private debt. Lenders in the private debt market must have the ability to evaluate the credit quality of borrowers and to perform ongoing risk monitoring. The purpose of this study is to examine the determinants of private debt holdings in the life insurance industry. The results suggest that larger insurers, insurers with higher financial quality, mutual insurers, publicly traded insurers, insurers facing stringent regulation, and insurers with greater cash holdings are more prevalent lenders in the private debt market.     

中国民营上市公司债务融资破产威胁功效的实证研究

以2002～2007年陷入财务危机的民营上市公司（ST公司）为研究样本．通过相关分析实证检验了中国债务融资的破产威胁功效.研究发现,中国民营上市公司债务融资总体上对财务状况恶劣的公司起到了债务治理作用,发挥了破产威胁功效。短期债务能够对陷入财务危机的民营上市公司起到改善业绩的作用,较好地发挥破产威胁功效,而长期债务未能发挥破产威胁作用。银行贷款能够促进陷入财务困境的民营上市公司改善业绩,发挥破产威胁功效,而商业信用却没能发挥破产威胁功效。     

US Evidence on Bank Takeover Motives: A Note

Existing studies on bank takeovers have not been able to distinguish among the three competing motives: synergy, agency, and hubris. This paper distinguishes the three competing motives by examining the relations between target gains and total gains and between acquirer gains and target gains. Empirical results show that bank takeovers are primarily motivated by synergy, although there is also strong evidence of hubris. Our results also suggest that hubris may explain the positive target gains and zero or negative acquirer gains found in this and many other bank takeover studies. Lastly, evidence exists to suggest that agency, along with hubris, may explain takeovers with negative total gains (JEL G21, G34).     

Determinants of Corporate Diversification: Evidence From the Property–Liability Insurance Industry

This article analyzes variations in line‐of‐business diversification status and extent among property–liability insurers. Our results show that the extent of diversification is not driven by risk pooling considerations; insurers operating in more volatile business lines do not diversify more. Diversification can rather be explained by the benefits of internal capital markets and barriers to business growth like market size and concentration. In our analysis, we distinguish between related and unrelated diversification. Using a measure of unrelated line‐of‐business diversification we find the first support for the diversification prediction of the managerial discretion hypothesis that mutual insurers should be less diversified than stock insurers. While mutual insurers tend to exhibit higher levels of total diversification, they engage in significantly less unrelated diversification than do stock insurers.     

The Determinants of Enterprise Risk Management: Evidence From the Appointment of Chief Risk Officers

Enterprise risk management (ERM) has captured the attention of risk management professionals and academics worldwide. Unlike the traditional "silo-based" approach to corporate risk management, ERM enables firms to benefit from an integrated approach to managing risk that shifts the focus of the risk management function from primarily defensive to increasingly offensive and strategic. Despite the heightened interest in ERM, little empirical research has been conducted on the topic. This study provides an initial attempt at identifying the determinants of ERM adoption. We construct a sample of firms that have signaled their use of ERM by appointing a Chief Risk Officer (CRO) who is charged with the responsibility of implementing and managing the ERM program. We use a logistic regression framework to compare these firms to a size- and industry-matched control sample. While our results suggest a general absence of differences in the financial and ownership characteristics of sample and control firms, we find that firms with greater financial leverage are more likely to appoint a CRO. This finding is consistent with the hypothesis that firms appoint CROs to reduce information asymmetry regarding the firm's current and expected risk profile.     

The effectiveness of the auditor's going-concern evaluation as an external governance mechanism: Evidence from loan defaults

When there is significant doubt about a firm's ability to continue as a going concern, professional standards require independent auditors to disclose the uncertainty in their report. This study assesses the influence of the independent auditor's going-concern evaluation by examining default following the release of the auditor's report. We use a proprietary sample maintained by the Portuguese Central Bank on 12,199 audit reports relating to approximately 2000 firms that are liable by law to have their accounts audited on an annual basis. Empirical estimation of a logit model controlling for accounting cash- flow-related and nonaccounting variables shows that the likelihood of default for firms that received going concern opinion is 2.792 times that of firms that received a clean opinion. Likelihood ratio tests for omitted variable also confirm the incremental predictive ability of going-concern opinion over and above accounting and nonaccounting variables for the estimation and hold-out samples. In the nondefaulting group, the average default rate is 6.05%, in the defaulting group it is 17.78%. The default rate for firms in the nondefaulting group that received a going-concern opinion is 9.92% and for firms that received a clean opinion it is 5.96%. In the defaulting group, the rate for firms that received a going-concern opinion is 35.49% and for firms that received a clean opinion it is 16.96%. Checks for robustness across different asset classes, age, industries, and regions indicate that firms that receive a going-concern opinion on average default more than those that receive a clean opinion.     

Preliminary Evidence on Takeover Target Returns in Spain: A Note

This paper measures the share price returns to Spanish takeover targets over the period 1990 to 1994. Using several estimation and testing methods, we show that target shareholders gain significant abnormal returns in the announcement period. In the first part of the year before the announcement period, firms that become targets do not show significant abnormal returns, though there is some significant upturn in the two months before the bid.     

The Impact of Asymmetric Information on Proxy Outcomes: An Empirical Test

If a manager-shareholder is better informed about the true value of a firm's shares than outside shareholders, then the management of an undervalued firm is hypothesized to use its incumbent advantage to win proxy contests to maintain control and to benefit from share revaluations induced by the positive signal value of the contest. Using insider trades as indicators of management's beliefs, this study finds an association between insider beliefs and proxy contest outcomes. In particular, when insider trades over a five-to-six month period preceding the proxy date are net purchases, the odds in favor of management winning are significantly higher.     

New Evidence on the Determinants of Bank Risk

This paper uses equity returns for publicly traded US bank holding companies (BHCs) from 1997 to 2004 to identify the determinants of risk, measured by equity market volatility, and examine how they have evolved. The results indicate that balance sheet items such as commercial and industrial loans and consumer lending and income statement items such as other noninterest income drive the cross-sectional differences in BHC risk. Newly mandated regulatory data on the components of other noninterest income show that investment banking, servicing, securitization income, gains from loan sales, gains other asset sales, and other noninterest income are particularly volatile activities. This highlights the value of increased transparency as a means to improve market discipline and reduce the opacity of complex financial institutions. Finally, in the years after 2000, the locus of risk has shifted off of the balance sheet and onto the income statement as investors identify the new risks associated with evolving and expanding bank activities.     

Employment Quota System and Labour Market Outcomes of Individuals with Disabilities: Empirical Evidence from South Korea

To date, only a few studies have attempted to evaluate the effectiveness of disability employment quota systems using structural changes in policies. This study exploits the structural changes in South Korea's disability employment quota system that took place in 2004 and 2006 to expand the current disability policy evaluation literature. We separate the effect of these changes in the quota system into their effect on the probability of labour force participation and their effect on the probability of employment (after controlling for selection into the labour market). We also study the extent to which the changes – which included increasing the number of employers covered by the quota system, the number of jobs available to individuals with disabilities and the financial incentives for employing individuals with disabilities – have affected job satisfaction among individuals with disabilities. Our results suggest that the changes in the quota system may have increased labour force participation but have had a limited positive impact on the probability of employment among people with disabilities in South Korea. Further, compulsory hiring and expanded opportunities have not substantially affected the level of job satisfaction observed among employees with disabilities relative to their non‐disabled counterparts.     

A Note on the Intraday Patterns of Initial Public Offerings: Evidence from Hong Kong

This paper examines the intraday patterns of IPOs in Hong Kong during the period 1995–1998. The results reveal that the well‐known under‐pricing phenomenon of IPOs occurs only at the opening trading of new issues and vanishes afterwards. The return volatility of IPOs is found to be high during the first trading session, and declines rapidly during the rest of the first trading day until the end of the trading day. The intraday return volatility of IPOs is found to follow a double U‐shape pattern, which is similar to that of the general market. A great deal of trading activity was recorded during the first five minutes of the trading day. Consistent results are obtained for IPOs registered during the pre‐crisis and post‐crisis periods. This paper has practical implications for investors. Investors can benefit from the under‐pricing only if they subscribe for new shares in the primary market. There is, however, no profit‐making opportunity for day traders who buy shares on the first trading day. This shows that the Hong Kong market is efficient in adjusting for the IPO under‐pricing. In addition, it is likely that, because of Hong Kong's share allotment method, only big investors who apply for large numbers of shares can benefit from this under‐pricing phenomenon.