Vulture Investors and the Market for Control of Distressed Firms

40 Pages Posted: 1 Feb 1997

See all articles by Edith S. Hotchkiss

Edith S. Hotchkiss

Boston College - Carroll School of Management

Robert M. Mooradian

Northeastern University, D’Amore-McKim School of Business, Finance Area

Date Written: March 1996

Abstract

This paper investigates the role of external agents, known as vulture investors, in the governance and reorganization of a sample of 288 firms which default on their public debt. Vultures are frequently active on boards and in the management of target companies, and gain control of 16% of the sample firms, often through the purchase of senior claims. We find positive abnormal returns for the target's common stock and bonds in the two days surrounding the announcement of a vulture purchase of public debt or equity. Valuation effects are strongly dependent on the level of priority of the claim purchased, and are greater when the investor becomes CEO or Chairman or gains control of the target firm. We also find the improvement in post-restructuring operating performance relative to the pre-default level is positively related to the presence of a vulture investor in management of the target firm. The evidence suggests vulture investors add value by disciplining managers of distressed firms.

JEL Classification: G12, G14, G34

Suggested Citation

Hotchkiss, Edith S. and Mooradian, Robert M., Vulture Investors and the Market for Control of Distressed Firms (March 1996). Available at SSRN: https://ssrn.com/abstract=1883 or http://dx.doi.org/10.2139/ssrn.1883

Edith S. Hotchkiss (Contact Author)

Boston College - Carroll School of Management ( email )

140 Commonwealth Avenue
Department of Finance Fulton Hall, Room 330
Chestnut Hill, MA 02467
United States
617-552-3240 (Phone)
617-552-0431 (Fax)

Robert M. Mooradian

Northeastern University, D’Amore-McKim School of Business, Finance Area ( email )

Boston, MA 02115
United States
617-373-5955 (Phone)
617-373-8798 (Fax)

Register to save articles to
your library

Register

Paper statistics

Downloads
2,048
Abstract Views
7,712
rank
6,893
PlumX Metrics