The Equity Performance of Malaysian Companies Emerging from Financially Distressed Condition

Article excerpt

ABSTRACT

Financial distress occurs when a company cannot meet its debt obligations or has to restructure its debt to avoid default. In Malaysia, Bursa Malaysia Berhad has set up Practice Note 4/2001 (PN4) in order to have separate classification for financially distressed companies. A financially distressed company will be de-listed if it fails to regularize its financial condition within the period stipulated by Bursa Malaysia. From the period of 2002 to 2004, 67% of PN4 companies have successfully implemented their restructuring plans. Consequently, this study attempts to investigate the stock price performance of emerging PN4 companies, which have restructured their financial condition using event study methodology. All thirty-five successfully restructured PN4 companies were taken as a sample in this study. Findings reveal that there are large, negative abnormal returns in 200 days following emergence from PN4. The results are a stark contrast compared to the findings in United States which have documented positive abnormal returns for companies emerging from financial distress.

Keywords: Malaysia; Event study; Restructuring

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I. INTRODUCTION

Study in bankruptcy using statistical method was started by Altman (1968) who developed the Z-score model to predict bankruptcy in the United States. This has led to the establishment of Zeta Model, which was used by over three dozen financial institutions (Altman, 1983). With strong interests in bankruptcy prediction, several researchers develop bankruptcy prediction model employing different statistical techniques such as logit model developed by Ohlson (1980), and artificial neural network (ANN) by Coates and Fant (1992). Bankruptcy prediction models can be useful to the stakeholders of a company. For example, lenders may use bankruptcy prediction model to assess the risk of loan default. Employees may want to assess the risk of bankruptcy and the resulting threat to continued employment.

Different economic situation can make companies become vulnerable to unexpected circumstances that can lead to poor performance. A long period of poor performance slowly brings firms into financial distress. Financial distress occurs when a firm cannot meet its debt obligations or has to restructure its debt to avoid default. It is a situation where a company's cash flow is inadequate to cover its current obligations. The obligations include unpaid debts to suppliers and employees, actual or potential damages from litigation, and missed principal or interest payments under borrowing agreements or default (Altman, 1993; Soo, Fauzias & Puan Yatim, 2001; Ward & Foster, 1997).

The definition of distressed in respect to listed company according to Bursa Malaysia Berhad (previously known as Kuala Lumpur Stock Exchange) is extensively defined in Chapter 18 and Chapter 22 in the Policies and Guidelines on Issue/Offer of securities. The guidelines stressed a company under Practice Note 4/2001 is defined as distressed company. Practice Note No. 4/2001 (PN4 thereafter) takes effect on 15 February 2001 in relation to paragraph 8.14 of the revamped Listing Requirements.

According to Bursa Malaysia Berhad, an affected listed company is one that meets any of the following criteria (source: www.bursamalaysia.com):

(a) deficit in the adjusted shareholders' equity on a consolidated basis;

(b) receivers and/or managers have been appointed over the company's property, or property of its major subsidiary or major associated company;

(c) auditors have expressed adverse or disclaimer opinion in respect of the company's going concerns in its latest audited accounts;

(d) special administrators have been appointed over the company, its major subsidiary or major associated company, pursuant to the provisions of the Pengurusan Danaharta Nasional Bhd Act 1998.

According to Eberhart, Altman and Aggarwal (1999), the stocks of companies emerging from Chapter 11 Bankruptcy Act in the US are called "orphan" equities among practitioners. …