Date of Award


Degree Type


Degree Name

Doctor of Philosophy in Business Administration




Interdepartmental Program

First Advisor

Henry R. Oppenheimer


This dissertation consists of three essays related to bankruptcy. In the first we explore how institutional investors trade shares of bankrupt firms five years prior to the firms petitioning for Chapter 11 reorganization. In the second we investigate whether or not institutional ownership is related to performance of distressed firms as they attempt to reorganize. Another main theme of this essay is to examine whether or not institutional managers who acquire shares of bankrupt firms within three months from Chapter 11 filings, during bankrupt firms’ reorganization, or shortly after bankruptcy proceedings possess ability to process information and to predict successful recovery of distressed firms by acquiring their undervalued shares in advance of improved share performance. The third essay explores changes in market and operating performances of merged bankrupt and distressed firms, analyzes whether or not distressed firms should pursue mergers and acquisitions (M&A) as an alternative to filing for Chapter 11, and evaluates how institutional investors trade shares of the firms that are about to be acquired. The main focus of the dissertation is to analyze how various market players behave as they face consequences of investing in, dealing with, or operating alongside the firms experiencing financial and/or operating difficulties that lead to filing for bankruptcy. In these three essays we intend to explore topics that have not previously been studied and presented in the finance literature.

In the first essay, we utilize a probability model to analyze institutions’ propensity to start selling shares of failing firms at some point during the five-year period preceding bankruptcy filings. We develop modifications of the Seyhun and Bradley (1997) methodology to analyze how much investment behavior of institutional investors resembles that of corporate insiders and partition our sample based on the size of trades to determine the magnitude of the results for each trading group. To address the issues of endogeneity and selection bias we use a standard two-stage Heckman model. We find that during the five-year period preceding a bankruptcy filing institutional investors (except those managing investment companies) are net buyers with a positive abnormal net number of shares traded during the period as compared to a control sample. Institutional managers start to sell shares of bankrupt firms sooner in some firms than in others; these earlier sales are of smaller firms with weaker operating performance, and lower equity risk. We observe strong signs of herding when assessing what prompts the institutions to start divesting failing investments. Institutional investors tend to sell well in advance of a bankruptcy filing firms that have smaller shareholdings of all institutional investors.

In the second essay we concentrate on analyzing institutional share purchases shortly before underperforming firms file for bankruptcy and while they are reorganizing. We determine types of institutions acquiring shares of bankrupt firms and track their investment behavior from the time of purchase to the time institutions start earning positive returns on investment or incur capital losses as a result of bankrupt firms’ unsuccessful attempts to reorganize. We analyze market returns of distressed firms and address where necessary the issue of missing return data (Peterson (1989)). We find that during the five-quarter period starting in the quarter of emergence from Chapter 11 institutional investors are net buyers of firms’ equity with a significantly larger positive abnormal net number of shares traded during the period as compared to a control sample. We also find that only in the quarter of emergence do the managers trade strategically. Institutional ownership negatively relates to bankrupt firms’ post-emergence operating performance improvement and positively relates to the firms’ post-emergence market performance recovery. Although the firms with institutional holdings have a better pre-bankruptcy operating performance and are less levered, we find that these characteristics do not relate to the firms’ post-emergence operating or market performance improvements.

In the third essay we utilize a probability model to test the likelihood of distressed firms being acquired prior to filing for bankruptcy. Further, we analyze changes in post-merger performance and compare it between the sample and control firms. As part of this analysis we define post-merger changes in operating cash flows as our dependent variable and have a binary variable measuring timing of acquisitions as one of the controls in the regression. We employ event study methodology to test the market reaction to acquisition announcements and how it affects security prices of targets and bidders. We find that distressed targets sell their assets at a premium or at a discount smaller than bankrupt firms do, thereby benefiting from acquisitions more than bankrupt targets. We also find that abnormal post-merger cash flow and cumulative abnormal return changes are more pronounced for bankrupt than distressed firms, indicating that acquisitions in Chapter 11 add greater economic value for both target and its acquirer than do acquisitions outside of bankruptcy. Insurance companies and, to a lesser extent, independent investment advisors recognize the acquired bankrupt firms’ post-merger operating and market performance improvements and increase their ownership in the firms starting two to three quarters prior to the acquisition announcements. However we find that market returns around the day of the announcements do not accurately reflect post-merger changes in the operating cash flow returns. Abnormal market returns are negative for bankrupt targets, suggesting that investors do not anticipate positive changes in firms’ future cash flows that we find as part of our analysis. Similarly, positive market reaction to acquisition announcements of distressed firms does not correspond to weak positive changes in their post-acquisition operating cash flow returns. We find post-merger market performance improvements for bankrupt and not distressed firms. In summary, distressed firms get a merger announcement premium and bankrupt firms give it away to their acquirers whose shareholders benefit from acquisition premiums in a year after the mergers.



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