Abnormal Trading Behavior of Specific Types of Shareholders Before US Firm Bankruptcy and its Implications for Firm Bankruptcy Prediction

39 Pages Posted: 8 Nov 2018

See all articles by Christine Cheng

Christine Cheng

The University of Mississippi - Patterson School of Accountancy; Louisiana State University

Stewart Jones

University of Sydney – School of Business

William J. Moser

Miami University

Date Written: October/November 2018

Abstract

This paper examines the trading behavior of US corporate insiders and certain groups of institutional investors (short‐term, transient, top‐performing, and those with fiduciary responsibility) in the eight quarters leading up to a US firm bankruptcy filing. Using a matched sample based on year, industry, and a probability of future bankruptcy model, we find that US corporate insiders display abnormal reduced net trading activity in the quarters before bankruptcy, with corporate insiders ‘going quiet’ immediately preceding a US bankruptcy. In contrast, we find that our identified types of institutional shareholders display abnormal selling activity several quarters before a US bankruptcy. We then use this information to enhance the bankruptcy‐predictive capabilities of recent machine‐learning techniques such as gradient boosting, as well as the probability of future bankruptcy model. We find that the variables measuring the absolute value of net purchases by US corporate insiders in the two quarters prior to bankruptcy, along with the changes in ownership by specific types of institutional shareholders, improve the out‐of‐sample predictive capabilities of our two different bankruptcy prediction models. Overall, we find that specific types of shareholder display abnormal trading in the quarters preceding US firm bankruptcy, and such information improves the out‐of‐sample accuracy of firm bankruptcy prediction models.

Keywords: bankruptcy prediction, financial distress, insider ownership, institutional ownership

Suggested Citation

Cheng, Christine and Cheng, Christine and Jones, Stewart and Moser, William J., Abnormal Trading Behavior of Specific Types of Shareholders Before US Firm Bankruptcy and its Implications for Firm Bankruptcy Prediction (October/November 2018). Journal of Business Finance & Accounting, Vol. 45, Issue 9-10, pp. 1100-1138, 2018, Available at SSRN: https://ssrn.com/abstract=3280466 or http://dx.doi.org/10.1111/jbfa.12338

Christine Cheng

The University of Mississippi - Patterson School of Accountancy ( email )

730 East Beach Blvd.
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Louisiana State University ( email )

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Baton Rouge, LA LA 70803
United States
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HOME PAGE: http://business.lsu.edu/Accounting/Pages/FacultyMember.aspx?UN=ccheng

Stewart Jones

University of Sydney – School of Business ( email )

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Sydney, NSW 2006
Australia

William J. Moser (Contact Author)

Miami University ( email )

2027 Farmer School of Business
800 East High Street
Oxford, OH 45056
United States
513-529-8284 (Phone)

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