Market Behavior of Institutional Investors around Bankruptcy Announcements

Abstract

This paper examines, using proprietary ASX data containing institutional holdings, if institutional investors exit en mass prior to announcements of financial distress. Evidence indicates that while some institutional investors exit the stock, the withdrawal is gradual, commencing approximately 115 days prior to event. This is driven by active institutional investors reacting to the release of the financially distressed companies' last publicly released financial reports. There is no significant decline in institutional holdings before announcements; most institutional investors hold financially distressed shares through to failure. There is evidence that the lack of disclosure drives the increase in information asymmetry prior to company failure.

Abnormal trading behavior of specific types of shareholders before US firm bankruptcy and its implications for firm bankruptcy prediction

“…Frino et al.’s () finding regarding active institutional investors is consistent with the largely US‐based research, which examines institutional investor trading behavior prior to various non‐bankruptcy news events. This US‐based research generally recognizes the heterogeneity of institutional investors and attempts to partition them into categories based on different investment horizons, different investment objectives and styles, and different fiduciary or legal restrictions (Yan & Zhang, ).…”

“…Initial research in the area of institutional investors or institutional ownership in the periods preceding bankruptcy treats these investors as a homogeneous group. For instance, Frino, Jones, Lepone, and Wong () examine aggregate institutional ownership in the periods leading up to firm bankruptcy. Using proprietary ASX data, Frino et al.…”

“…Using proprietary ASX data, Frino et al. () find that most institutional investors retain their equity interests through the bankruptcy process, with only active institutional investors gradually selling their equity interests in the 115 days leading up to the Australian firm's bankruptcy announcement.…”

Should macroeconomic information be released during trading breaks in futures markets?

“…One measure of market liquidity is the bid-ask spread which is a proxy for information asymmetry and also a component of trading costs (see Frino, Jones, Lepone, & Wong, 2014). One measure of market liquidity is the bid-ask spread which is a proxy for information asymmetry and also a component of trading costs (see Frino, Jones, Lepone, & Wong, 2014).…”

The impact of mandatory IFRS reporting on institutional trading costs: Evidence from Australia

“…For detailed explanations of the methodologies, refer to Frino, Jones, and Wong (), Frino et al. (2013), Frino, Jones, Lepone, and Wong () and Lepone and Wong ().…”