Evidence from Impending Bankrupt Firms that Long Horizon Institutional Investors are Informed About Future Firm Value

42 Pages Posted: 17 Aug 2014 Last revised: 19 Aug 2014

See all articles by Santhosh Ramalingegowda

Santhosh Ramalingegowda

University of Georgia - Terry College of Business

Date Written: January 15, 2014

Abstract

A key assumption in many accounting and finance studies is that long horizon institutional investors are informed shareholders. Yet past empirical research finds no evidence that these institutions anticipate major corporate events, including earnings-based events. I find that long horizon institutions are better informed in that they sell more shares of impending bankrupt firms than of matched distress firms at least one quarter ahead of bankruptcy. Share sales are greater in impending bankrupt firms whose shareholders ultimately lose all of their equity. In additional analyses, I document greater share sales by long horizon institutions with supposedly superior information processing abilities and/or access to corporate management. Share sales are significantly less in the post Regulation FD era. Overall, my findings support the validity of the common assumption that long horizon institutions are informed. Regulation FD appears to mitigate (but not eliminate) their information advantage.

Keywords: Institutional investors, Bankruptcy, Private information, Long horizon

JEL Classification: G11, G20, G33

Suggested Citation

Ramalingegowda, Santhosh, Evidence from Impending Bankrupt Firms that Long Horizon Institutional Investors are Informed About Future Firm Value (January 15, 2014). Review of Accounting Studies, Vol. 19, No. 2, 2014, Available at SSRN: https://ssrn.com/abstract=2481285

Santhosh Ramalingegowda (Contact Author)

University of Georgia - Terry College of Business ( email )

Brooks Hall
Athens, GA 30602-6254
United States
706-542-3612 (Phone)

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