Does industry-wide distress affect defaulted firms? Evidence from creditor recoveries

Using data on defaulted firms in the United States over the period 1982–1999, we show that creditors of defaulted firms recover significantly lower amounts in present-value terms when the industry of defaulted firms is in distress. We investigate whether this is purely an economic-downturn effect or also a fire-sales effect along the lines of Shleifer and Vishny [1992. Liquidation values and debt capacity: a market equilibrium approach. Journal of Finance 47, 1343–1366]. We find the fire-sales effect to be also at work: Creditors recover less if the industry is in distress and non-defaulted firms in the industry are illiquid, particularly if the industry is characterized by assets that are specific, that is, not easily redeployable by other industries, and if the debt is collateralized by such specific assets. The interaction effect of industry-level distress and asset-specificity is strongest for senior unsecured creditors, is economically significant, and robust to contract-specific, firm-specific, macroeconomic, and bond-market supply effects. We also document that defaulted firms in distressed industries are more likely to emerge as restructured firms than to be acquired or liquidated, and spend longer time in bankruptcy.     

Vendor performance with supply risk: A chance-constrained DEA approach

The strategic importance of vendor evaluation is well established in the purchasing literature. Several evaluation methodologies that consider multiple performance attributes have been proposed for vendor evaluation purposes. While these techniques range from scoring models that utilize prior articulation of weights to derive composite scores for vendors to advanced mathematical models, methods that incorporate the inherent variability in vendor's performance attributes have been limited. The primary reason for the lack of development of such models is due to the complexities associated with stochastic approaches. In order to more accurately evaluate the performance of vendors, it is critical to consider variability in vendor attributes. This paper is an attempt to fill this void in vendor evaluation models by presenting a chance-constrained data envelopment analysis (CCDEA) approach in the presence of multiple performance measures that are uncertain. Our paper effectively demonstrates the first application of CCDEA in the area of purchasing, in general, and vendor evaluation, in particular. The model is demonstrated by applying it to a previously reported dataset from a pharmaceutical company.     

Auditor Reputation,Auditor Independence,and the Stock‐Market Impact of Andersen's Indictment on Its Client Firms*

In this paper, we study a broad sample of Arthur Andersen clients and investigate whether the decline in Andersen's reputation, due to its criminal indictment on March 14, 2002, adversely affected the stock market's perception of its audit quality. Because these reputa‐tional concerns are more of an issue if an auditor's independence is impaired, we investigate the relationship between the abnormal market returns for Andersen clients around the time of the indictment announcement and several fee‐based measures of auditor independence. Our results suggest that when news about Andersen's indictment was released, the market reacted negatively to Andersen clients. More importantly, we find that the indictment period abnormal return is significantly more negative when the market perceived the auditor's independence to be threatened. We also examine the abnormal returns when firms announced the dismissal of Andersen as an auditor. Consistent with the audit quality explanation, we document that when firms quickly dismissed Andersen, the announcement returns are significantly higher when firms switched to a Big 4 auditor than when they either switched to non‐Big 4 auditors or did not announce the identity of the replacement auditor. Our empirical results support the notion that auditor reputation and independence have a material impact on perceived audit quality and the credibility of audited financial statements, and that the market prices this.     

CAUSALITY TESTS OF SHORT SALES ON THE NEW YORK STOCK EXCHANGE

Published statistics on short sales of stock are used by investors as a technical indicator of market timing. Research on this topic is mixed. Findings in this article rely on causality tests that use white noise residuals generated from time-series analysis of short sales. Results indicate that specialists' short sales lead short sales of other investors, but these other investors are unable to take advantage of the information because a time lag exists in the published data.     

Testing for Unit Roots in Market Shares*

A unique characteristic of marketing data sets is the logical consistency requirement in market share models that market shares are bounded by 0 and 1, and they sum to unity. To take account of this logical consistency requirement, we propose to test for unit roots in individual market share series within the context of a market share attraction (MCI) framework. Our paper offers new contributions in testing for unit roots in market shares. First, a novel feature of our paper is that we propose a new unit root testing methodology designed to deal with the logical consistency requirement in market share models within the context of a market share attraction (MCI) framework. A second novel component of our paper is that we demonstrate how one could use the Johansen (1995) test to identify unit roots. This is implemented using Eviews software. The Johansen test is a system-based test rather than a single equation test; it is more appropriate given the dependencies in the market share relationships. Finally, we demonstrate using simulations that our procedure works well and improves substantially on the univariate Dickey-Fuller procedure. Accordingly, our procedure leads to better unit root inference than the univariate Dickey-Fuller method; the latter is not that reliable when dealing with market shares. We conclude the paper with suggestions for future research.     

Corporate governance when founders are directors

We examine chief executive officer (CEO) compensation, CEO retention policies, and mergers and acquisition (M&A) decisions in firms in which founders serve as a director with a nonfounder CEO (founder-director firms). We find that founder-director firms offer a different mix of incentives to their CEOs than other firms. Pay-for-performance sensitivity for nonfounder CEOs in founder-director firms is higher and the level of pay is lower than that of other CEOs. CEO turnover sensitivity to firm performance is also significantly higher in founder-director firms compared with nonfounder firms. Overall, the evidence suggests that boards with founder-directors provide more high-powered incentives in the form of pay and retention policies than the average US board. Stock returns around M&A announcements and board attendance are also higher in founder-director firms compared with nonfounder firms.     

Implementation of a System Approach for Enhanced Supply Chain Continuity and Resiliency: A Longitudinal Study

Researchers and practitioners frequently point to inventory as a necessary component of an effective supply chain strategy. However, an undisciplined or ineffective approach to inventory can have a detrimental impact on an organization and its entire supply chain. When making inventory decisions, firms must ensure that the selected approach “fits” the overall supply chain strategy. While such an assertion seems intuitive, there is a need for empirical validation. We seek to contribute to this important body of research by investigating the impact of improved strategic alignment of inventory on resiliency and continuity. More specifically, we investigate the impact of improved strategic fit by comparing two distinct approaches to inventory management within a service parts environment. We hypothesize that a well‐aligned approach to inventory management can enhance continuity and resiliency. We test these hypotheses via a longitudinal field study involving 10 United States Air Force (USAF) locations and two years of data (approximately 650,000 inventory transactions). Results from nine test locations and one control location suggest that a well‐aligned approach to inventory management is indeed effective in improving continuity and resiliency, thus enhancing service‐based strategies—in this case, the USAF's ability to be mission‐capable. While the results of the study are derived from the USAF, we believe the implications provide broader insight into the use of inventory as a means of realizing a strategic fit.     

Adopting bioenergy crops: Does farmers’ attitude toward loss matter?

We apply prospect theory to examining farmers’ economic incentives to divert a share of their land to bioenergy crops (miscanthus and switchgrass in this study). Numerical simulation is conducted for 1,919 rain‐fed U.S. counties to identify the impact of loss aversion on bioenergy crop adoption, and how this impact is influenced by biomass price, discount rate, credit constraint status, and policy instruments. Results show that ignoring farmer's loss aversion causes overestimation of miscanthus production but underestimation of switchgrass production, particularly when farmers are credit constrained and have a high discount rate. We find that establishment cost subsidy induces more miscanthus production whereas subsidized energy crop insurance induces more switchgrass production. The efficacy of these two policy instruments, measured by biomass production increased by per dollar of government outlay, depends on the magnitude of farmers’ loss aversion and discount rate.     

Asset specificity,firm heterogeneity and capital structure

This paper presents an empirical investigation of the importance of specialized assets and other unique characteristics of a firm in explaining the variance in capital structure across firms. The results show that firm-specific effects contribute most to the variance in leverage, suggesting a strong link between strategy and capital structure.