Wall Street Journal Distress Disclosures and Bankruptcy Research

By Dawkins, Mark C.; Rose-Green, Ena | Academy of Accounting and Financial Studies Journal, September 2007 | Go to article overview

Wall Street Journal Distress Disclosures and Bankruptcy Research


Dawkins, Mark C., Rose-Green, Ena, Academy of Accounting and Financial Studies Journal


ABSTRACT

This study assesses the extent to which the Wall Street Journal (WSJ) is a useful and reliable source of distress disclosures for bankruptcy research. Prior accounting and finance studies document the importance of controlling for distress disclosures in bankruptcy research. These studies identify distress disclosures from numerous sources: 8-Ks, 10-Ks, NT10-Ks, LEXIS, annual reports, Moody's Industrial Manuals, the F&S Index of Corporate Changes, the Dow Jones News Service, and the WSJ. Some sources are costly (e.g., 8-Ks, 10-Ks, NT10-Ks, and the Dow Jones News Service), while other sources do not provide timely distress disclosures (e.g., LEXIS, annual reports, Moody's Industrial Manuals, and the F&S Index of Corporate Changes). This study focuses on the WSJ since it potentially represents a low-cost, timely, and widely-disseminated source of distress disclosure information. We first construct an aggregate WSJ distress disclosure measure, and find that this aggregate WSJ distress disclosure measure mitigates bankruptcy filing price reactions. We then examine WSJ reporting of six types of distress disclosures, and find that three types of WSJ distress disclosures mitigate bankruptcy filing price reactions: qualified audit opinions, technical defaults, and possible bankruptcy filings. The WSJ thus provides a useful and reliable source of distress disclosures for bankruptcy research.

INTRODUCTION

Extant research indicates that disclosures of bankruptcy filings produce significant negative price reactions. (1) The magnitude of the price decline is directly related to the amount of surprise in the bankruptcy filings. Prior distress disclosures increase investors' a priori assessment of firms' probability of bankruptcy, thus potentially reducing the surprise in subsequent bankruptcy filings. Abnormal returns surrounding bankruptcy filing should therefore differ between firms with prior distress disclosures and firms without such disclosures. Specifically, firms with prior distress disclosures should have smaller negative price reactions to their bankruptcy filings. Several studies report results consistent with this expectation.

Beneish and Press (1995) find that price reactions to bankruptcy filings are mitigated if preceded by technical default. Chen and Church (1996) and Dawkins and Rose-Green (1998) find that price reactions to bankruptcy filings are mitigated if preceded by going concern audit opinions and prior Wall Street Journal disclosures of possible bankruptcy filings, respectively. Rose-Green and Dawkins (2000) find that, at the time of bankruptcy filing, subsequently liquidated firms have significantly larger negative price reactions than subsequently reorganized firms. Dawkins et al. (2006) provides evidence that price declines immediately after bankruptcy filing are followed by short-lived price increases. Additionally, Giroux and Wiggins (1984) identify three distress events (net losses, debt accommodation, and loan default) that are significantly associated with bankruptcy, while Ward, Foster, and Woodroof (1998) identify two distress events (loan default/accommodation and loan covenant violations) that are significant explanatory variables of bankruptcy. The results of these studies indicate that researchers should control for prior distress disclosures in bankruptcy research to prevent potentially understating the effect of bankruptcy on stock prices.

These studies identify distress disclosures from numerous sources: 8-Ks, 10-Ks, NT10-Ks, LEXIS, annual reports, Moody's Industrial Manuals, the F&S Index of Corporate Changes, the Dow Jones News Service, and the Wall Street Journal (WSJ). Several of the distress disclosure sources are costly (e.g., 8-Ks, 10-Ks, NT10-Ks, LEXIS, and the Dow Jones News Service), while other sources may not report distress information in a timely manner (e.g., LEXIS, annual reports, Moody's Industrial Manuals, and the F&S Index of Corporate Changes). …

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