A Study on Business Failure Using Stock Return
Asian Tax Journal Vol. 5 No. 2 (2004), pp. 107-133
Abstract
This study investigates is to compare CAR (CAR：cumulated abnormal return) between well-managed companies and poorly-managed companies to see if corporate insolvency is properly reflected to the capital market. In addition, a couple of financial ratio analysis are done to identify causes of CAR difference. Based on manufacturing companies (Group A), which were put on the watch list for government management between 1997 and 1999, are selected for this study, while other 43 well-managed manufacturing companies (Group B), which are similar with Group A in their industry type and asset size, are selected for comparison. Analysis is done on a monthly basis from 36 months prior to insolvency to insolvency. For analysis, CAR of poorly-managed companies is compared to zero value (0) and CAR of well-managed companies. For statistics, t-test and Wilcoxon signed rank test are done. The result of analysis is as follows：1) CAR and 0 (zero) of poorly-managed companies shows a significant difference for the most of analysis period. 2) there is no significant difference in CAR between poorly-managed companies and well-managed companies for the most of analysis period. However, CAR of well-managed companies are 5% and 1% higher than that of poorly-managed companies 1 month prior to insolvency and the time of company getting insolvent respectively, showing a significant difference. There is no significant difference for the rest of period, because 1) the management of poorly-managed companies took profit-boosting measures. 2) the Korean economy as a whole was in financial difficulties. 3) poorly-managed companies did a window-dressing settlement of accounts - reducing debt ratio, over-appropriating assets, etc. -, resulting in exaggeration of figures in financial reports, which in turn serves as a basic info investors use to make their investment (Functional Fixation).
Keywords
- corporate failure
- stock return
- functional fixation