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Wiley Financial Management Association International
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Financial
Lender
Distress, Asset
Monitoring
Sales,
and
I. Theoretical Background
Empirical evidence demonstrates that, on average,
divestitures lead to significant share price increases.
Table 1 summarizes this evidence. There are two
principal theories that seek to explain such value
increase by 1) improving "fit and/or focus" (John and
58
FINANCIAL
/ AUTUMN
MANAGEMENT
1996
Study, Year
Sample Size
and Period
Methodology
CAR(%)
Event Days
Test Statistic
MM
3.55
(-5,5)
t = 3.14"**
58
(1979-81)
Rosenfeld, 1984
MAR
2.33
(-1,0)
t = 4.60***
62
(1969-81)
MKADJ
0.40
-0.31
(-1,0)
NS
NS
N/A
1.45
(-1,0)
t = 5.36***
53
39
(1964-73)
77
(1977-82)
MM
MM
7.25
0.09
(-12 months, 12
months)
NS
(0)
NS
78
(1976-78)
1064
(1970-78)
Klein, 1986
MM
1.12
(-2,0)
t = 2.83***
202
(1970-79)
MAR
1.42
(-1,0)
t = 4.06***
75
(1975-82)
MM
1.66
(-1,0)
z = 4.08***
55
(1963-83)
MM
1.64
2.83
(-1,0)
t = 4.02***
t = 5.12***
64
26
(1975-82)
MM
1.12
(-1,0)
z = 9.12***
468
(1973-85)
MAR
1.47
(-1,0)
t = 4.36***
MKADJ
-0.01
0.01
(-6,6)
(T-6,T+6)?
NS
NS
75
(1975-82)
50
(1970-81)
MM
0.92
(-1,0)
z = 6.33***
278
(1981-87)
MM
0.85
(-1)
t = 5.23***
178
(1985-86)
MM
0.10
(-1,0)
NS
62
(1979-88)
MM
1.50
(-2,0)
***
321
(1986-88)
MM
1.41
(-1,0)
z = 3.61***
93
(1984-89)
***Significant at the 0.01 level, NS denotes not significant at the 0.05 level.
59
A. Divestment by FinanciallyHealthyFirms
B. Divestments by FinanciallyDistressed
Firms
D. Impactof LenderMonitoring
C. ComparativeImpactof Divestments by
Distressed and HealthyFirms
In the case of a healthy-firm divestor, shareholder
are not used to pay down debt (Brown et al., 1994). While we
do not examine how the divestment proceeds are used by our
sample firms, the presumption that they are used to pay off
lenders introduces a bias against observing significant positive
abnormal returns for our distressed sample.
60
FINANCIALMANAGEMENT
/ AUTUMN1996
85
86
I
10
5
7
12
9
10
9
9
9
4
2
3
1
0
0
3
4
3
Month
85
86
1
16
7
11
9
9
9
10
7
8
9
16
13
9
10
10
8
22
16
61
B. Data
td=
CAR
T 1/2AR
AR
(2)
T1/2
T/2
((2ARD
2AR,D
A2
(31/2)
2AR,H12
Ei
2SiZ + P3Ci
(4)
C'3iZi"C7
AR(-,Oiis the abnormalreturnfor firm i on days -1 and
0 where
D.
Z.
Si
62
FINANCIALMANAGEMENT
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Figure 1. Cumulative Abnormal Returns for 21-day Event Period Centered on Announcement
Day 0 for the Financially Distressed and Financially Healthy Samples
0.06
C,
ci
a)
0.04
CO
-0
0
E -0.02
0.04
-15
-10
-5
10
15
FinanciallyHealthy
MONITORING
ASSETSSALES&LENDER
&TAFFLER
/ FINANCIAL
DISTRESS,
LASFER,SUDARSANAM,
63
All Firms
Healthy
Cumulation
Interval
(T days)
CAR %
-10 to 10
-0.10
CAR %
CAR %
-0.13
2.22
0.95
-0.42
-0.52
1.13
-2 to 0
1.27
4.25***
1.70
1.94*
1.16
3.81***
0.58
-1
0.24
1.38
0.91
1.80*
0.07
0.42
1.57
0.58
3.34***
1.21
2.38**
0.42
2.39**
1.47
-1 to 0
0.82
3.34***
2.12
2.96***
0.49
1.99**
2.21
1 to 10
0.32
0.59
0.35
0.22
0.32
0.57
0.02
Distressed Firms
Healthy Firms
Mean
Median
St. Dev.
Mean
Median
St. Dev.
Mean
Median
St. Dev.
Debt Financing
Ratio
0.33
0.32
0.15
0.49
0.48
0.15
0.29
0.30
0.12
6.39***
Relative
Divestment
Size (%)
8.8
4.2
7.7
4.0
9.8
1.74*
Completion
Completion
Announcement
0.56
11.2
13.4
0.50
5.0
15.0
0.58
td
-0.76
is extended to (-2,0),
Hol is still
64
FINANCIALMANAGEMENT
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(t statistic)
Adj. R2
Pa
-0.026**
(-2.46)
0.118***
-0.057*
(3.82)
(-1.82)
-0.039
(-1.10)
p12
0.109***
(3.86)
(F- Statistic)
,3
-0.008
0.012
0.25
(-0.51)
(0.66)
(7.06)
B. Impactof ExplanatoryVariables
Table 3 reports descriptive statistics for the
explanatory variables in Equation (2). As we would
expect, the distressed firms rely to a much greater
extent on debt financing, with their mean debt
financing ratio almost 70% higher. This difference is
significant at the 0.01 level. Sell-offs by these firms are
also of greater relative size, on average, than those of
the healthy firms, with the difference significant at the
0.10 level. On the other hand, the two samples do not
differ in terms of the relative frequency of completion
versus intention-only announcements.
Table 4 presents the coefficient estimates for the
regressionmodel Equation(4). The results indicate that
a significant proportion of the market reaction to selloffs is explainedby the explanatoryvariables(R2=0.25).
The coefficient on the debt financing ratio D, is
positive and significant at the 0.01 level. This suggests
that debt obligations lead to effective monitoring of
managers, compelling them to take value-maximizing
decisions. This is consistent with the arguments of
Jensen (1989) and Ofek (1993). Further,the negative
(and significant at the 0.10 level) coefficient on the
indicates that such monitoring is
interactive term
DAZi
more effective in the case of the distressed firms, as
argued above. This result also highlights the
incremental impact of bankruptcy risk on divestor
returns over and above that of debt level and points
to the danger of using debt level as a proxy for
bankruptcyrisk. H03is therefore rejected.
The announcement of divestment completion (as
65
References
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