Tuesday 26 November

Institutional Ownership and the Resolution of Financial Distress

Jocelyn Martel, INSEAD

ESSEC Business School

Abstract:

To investigate the role of divergent interests among large institutional investors in a distressed firm’s restructuring decision, we construct and analyse a unique and comprehensive data set on equity and bond ownership in a sample of Chapter 11 and exchange offer firms. Using instrumental variable probit estimation to account for possible endogeneity of equity and bond holdings, we find that equity holdings by government, hedge fund, investment advisor, pension fund, and private equity investor types are significantly positively associated with exchange offers. By contrast, bond holdings by institutional investor type are not systematically associated with Chapter 11 or an exchange offer. In addition, while several financial ratios are highly significant, indicating the importance of financial structure in the restructuring decision, debt structure does not appear to play any role. Only aggregate debt-related variables are related to the decision: the number of bonds, which is positively associated with Chapter 11, and the number of subordinate bonds, which is positively associated with exchange offers. Robustness checks of the IV probit estimation by elastic net, confirm the selection of institutional investor equity and bond holdings variables in the empirical approach.

Registration, please contact robin@em-lyon.com

Room Roland Calori, B3, Lyon campus