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• The effect of size, book-to-market ratio and prior distress information on the market reaction to troubled debt restructuring announcements

• Economic benefits, informativeness and value-relevance of troubled debt restructurings: some evidence and policy implications

• The role of size and book-to-market ratio as proxies for fundamentals and as determinants of returns in the Istanbul stock exchange

 



The effect of size, book-to-market ratio and prior distress information on the market reaction to troubled debt restructuring announcements

This paper examines the excess returns in financially distressed firms that attempt to restructure their debt privately. As suggested by the firms' financial and asset characteristics, the economics of the restructuring transaction and option pricing theory, significantly positive announcement and post-announcement excess returns accrue to shareholders as their firms renegotiate. The finding of an anomalous-signed positive size and negative book-to-market effects confirms that the abnormal returns are not a compensation for higher risk or a result of higher exit values of assets or market irrationality. Instead, the announcement seems to provide an unexpected, favorable signal for larger firms whose financial distress has already been disseminated.

Key words: Troubled debt restructuring, financial distress, abandonment option, size, book-to-market

 



Economic benefits, informativeness and value-relevance of troubled debt restructurings: some evidence and policy implications

This paper investigates the beneficial economic consequences and market and accounting based valuation effects of troubled debt restructurings (TDRs) for financially distressed debtor firms. First, using extant valuation theories, it predicts the impact of TDR on shareholders' wealth. Next, it provides empirical evidence on the beneficial outcomes and informativeness of TDRs: improvement in financial profiles of debtor firms, significantly positive announcement and post-announcement excess returns, and higher excess returns to subsequently consummated restructurings and subsequent survivors. Since the current GAAP requires different reporting practices for full-settlement and modification type restructurings, market's assessment of their impact on the returns of debtor firms is also measured. Finally, a valuation model conditional on book values and earnings is used to test the value-relevance of the reported bottom lines and TDR related disclosures. The findings suggest that both types of TDRs are beneficial to debtors and informative to market participants, and the recognition of the reduction in the liability and the related gain in the financial statements would be more congruent with the valuation effects assessed by market participants.

Key words: Private workouts, Financial distress, SFAS No. 15, Valuation, Capital markets


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The role of size and book-to-market ratio as proxies for fundamentals and as determinants of returns in the Istanbul stock exchange

This study is a cross-sectional and intertemporal attempt to relate firm size and book-to-market equity to average returns and to financial distress related fundamentals in the Istanbul Stock Exchange (ISE) during the 1993-1997 period. When monthly excess returns on 16 size/book-to-market sorted portfolios are regressed against the market factor and the risk factors related to small size (SMB) and high book-to-market equity (HML), we find that the explanatory factors do indeed capture common factors in returns related to size and book-to-market equity. However, an analysis of all sample firms over the sample period indicates that size is a better proxy for financial distress and a more significant determinant of average and excess returns in the ISE.

Keywords: Size; Beta; Book-to-market ratio; Asset pricing; Financial distress risk, The Istanbul Stock Exchange


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