Financial Distress Announcement, Transaction mode Change, and Aggregate Shareholder Wealth: Empirical evidence from TAIEX- Listed Companies* Gili Yen** University Professor, Chaoyang University of Technology, Taiwan and Jian-fa Li Assistant Professor, Chaoyang University of Technology, Taiwan *Published at Review of pacific Basin Financial Markets and Policies (vol.13. no.1, pp.9- 43). ** 報告人顏吉利特聘教授，簡介內容與去年相同即可

2 主講人簡介 學 歷：國立台灣大學經濟學學士、碩士，美國華盛頓大學經濟學研究所博士。 經 歷：曾任南開技術學院財金系 / 企管系合聘講座教授、朝陽科技大學企管系 教授兼管理學院院長、中國開發主任秘書、台灣經濟研究院研二所所 長、中國財務學會 ( 現更名為台灣財務金融學會 ) 創會秘書長、中國經濟 學會 ( 現更名為台灣經濟學會 ) 理事、國立中央大學財務管理研究所教授 兼所長、國立中央大學產業經濟研究所教授兼所長、中華經濟研究院 副研究員，現任朝陽科技大學企管系特聘教授。 專業成就：發表國際學術論文四十餘篇，先後獲收錄於 Who’s Who in the World (Marquis;1999) 、 Five Hundred Leaders of Influence(ABI;1999) 、 The Asia 500 (Barons;2000) 、 The Global 500(Barons;2001) 、 Lifetime of Achievement One Hundred(IBC;2004) 等世界名人錄。

3 Outline Research Objective Hypotheses Development Empirical Data Empirical Analysis Conclusions

4 Research Issue(1/2) Concerning the magnitude of bankruptcy costs, or, for that matter, scholars have to reach a consensus yet. Warner (1997): Direct bankruptcy costs are between 3% and 5% of pre- bankruptcy market value of companies; Altman (1984): Taking into account indirect bankruptcy6 costs, bankruptcy costs are roughly 20% of pre-bankruptcy market value of companies; Chen & Mervile (1999): Although no estimates were provided, they argue the indirect bankruptcy costs are underreported in the literature; Kaplan (1994), on the other hand, points out that the financially distressed firm might gain from adjusting the financial structure.

5 Research Issue(2/2) Over estimating financial distress costs: It would lead to the sub-optimal use of corporate debt, hence, cost the advantages of tax shied. Under-estimating financial distress costs: It would lead the firm into a serious financial trouble once financial distress takes place.

6 Previous researchers estimate the financial distress costs by comparing the financial statements pre- and post-financial distress. However, the financial statements could fail to respond to actual change in financial position during the period of financial distress. At the present study, in viewing the drop in the stock prices of the listed companies can better reflect the deterioration of the asset, it is hoped that we can come up with a more comprehensive, reliable estimate of financial distress costs. Research Objective

7 Andrade & Kaplan (1998) define financial distress cost as change in total value of assets during the period of two months prior to highly leveraged transactions to the end of financial distress. We follow the spirit of the definition of Andrade & Kaplan (1998), the form “financial distress costs” in the present study would be defined as: average percentage decrease in stock price during the date of reporting financial distress to 20 transaction days after the date of changing transaction mode, relative to the average stock prices of the base period. Hypotheses Development(1/5)

8 Hypothesis 1: H 0 ： The average percentage reduction in the stock price for the financially distressed companies during the entire observation period (three sub-periods) is equal to zero when compared with the arithmetic stock price of various base periods. H 1 ： The average percentage reduction in the stock price for the financially distressed companies during the entire observation period (three sub-periods) is larger than zero when compared with the arithmetic stock price of various base periods. Hypotheses Development(2/5)

Hypotheses Development(3/5) Hypothesis 2: H 0 : The average percentage reduction in the stock price for the group of “cash transaction only/suspended trading” upon the date of changing transaction mode up to the 20th transaction day after the change is equal to the average percentage reduction in the stock price for the group of “maintaining normal trading” during the same period. H 1 : The average percentage reduction in the stock price for the group of “cash transaction only/suspended trading” upon the date of changing transaction mode up to the 20th transaction day after the change is greater than the average percentage reduction in the stock price for the group of “maintaining normal trading” during the same period.

Hypotheses Development(4/5) Hypothesis 3: H 0 ： The average percentage reduction in the stock price for the group of “delisting” upon the date of changing transaction mode up to the 20th transaction day after the change is equal to the average percentage reduction in the stock price for the group of “maintaining normal trading” during the same period. H 1 ： The average percentage reduction in the stock price for the group of “delisting” upon the date of changing transaction mode up to the 20th transaction day after the change is greater than the average percentage reduction in the stock price for the group of “maintaining normal trading” during the same period.

Hypotheses Development(5/5) Hypotheses 4: H 0 ： The average percentage reduction in the stock price for the group of “delisting” upon the date of changing transaction mode up to the 20th transaction day after the change is equal to the average percentage reduction in the stock price for the group of “cash transaction only/suspended trading” during the same period. H 1 ： The average percentage reduction in the stock price for the group of “delisting” upon the date of changing transaction mode up to the 20th transaction day after the change is greater than the average percentage reduction in the stock price for the group of “cash transaction only/suspended trading” during the same period.

12 The daily stock prices of the present study are collected from the publication of Taiwan Stock Exchange (TSE), main newspapers and the database of Taiwan Economic Journal. After collecting the 104 TAIEX-listed financially distressed companies during the period from 1998 to 2004 we classified them into three mutually exclusive groups according to the ruling of the Securities and Futures Commission, Ministry of Finance, including (1) the “maintaining normal trading” group, (2) the “cash transaction only/suspended trading” group (3)the“ delisting” group. Empirical Data

Empirical Analysis(1/7) Figure 1

Empirical Analysis (2/7) Table 1 A base period covering one year prior to the date of reporting financial distress A base period covering half a year prior the date of reporting financial distress A base period covering one quarter prior the date of reporting financial distress A base period covering one month prior the date of reporting financial distress Date average percentage change in stock price t statistic average percentage change in stock price t statistic average percentage change in stock price t statistic average percentage change in stock price t statistic A % % % %-6.72 A-36.50% % % %-8.18 A % % % %-8.91 C-51.98% % % %-7.43 C % % % %-10.77

For the entire sample, this study finds that the Financially distressed companies during the period from the date of reporting financial distress in the press up to 20 transaction days after the date of changing transaction mode have registered a huge reduction in stock price. Empirical Analysis (3/7)

Empirical Analysis (4/7) Table 2 Date Average percentage change in stock price for group of cash transaction only/suspended trading Average percentage change in stock price for group of maintaining normal trading Difference in average percentage change in stock price of these two groups right hand side t statistic Panel A ： A base period covering one year prior to the date of reporting financial distress C-59.89%-27.61%-32.28%-2.68 *** C %-27.94%-49.01%-4.25 *** Panel B ： A base period covering half a year prior to the date of reporting financial distress C-53.00%-16.51%-36.49%-2.71 *** C %-16.58%-56.16%-4.35 *** Panel C ： A base period covering one quarter prior to the date of reporting financial distress C-49.20%-9.72%-39.48%-3.01 *** C %-10.42%-60.14%-4.83 *** Panel D ： A base period covering one month prior to the date of reporting financial distress C-44.94%-5.45%-39.49%-3.20 *** C %-6.95%-61.31%-5.48 ***

Empirical Analysis (5/7) Table 3 Date Average percentage reduction in the stock price for the group of “delisting” Average percentage reduction in the stock price for the group of “maintaining normal trading” Difference in the average percentage reduction in the stock price of these two groups right hand side t-statistic Panel A ： A base period covering one year prior to the date of reporting financial distress C-86.93%-27.61%-59.32%-4.79 *** C %-27.94%-64.36%-5.58 *** Panel B ： A base period covering half a year prior to the date of reporting financial distress C-83.32%-16.51%-66.81%-4.72 *** C %-16.58%-73.66%-5.63 *** Panel C ： A base period covering one quarter prior to the date of reporting financial distress C-78.81%-9.72%-69.09%-4.68 *** C %-10.42%-76.82%-5.84 *** Panel D ： A base period covering one month prior to the date of reporting financial distress C-70.19%-5.45%-64.74%-3.79 *** C %-6.95%-74.48%-5.38 ***

Empirical Analysis (6/7) Table 4 Date Average percentage reduction in the stock price for group of delisting Average percentage reduction in stock price for the group of cash transaction only/suspended trading Differences in the average percentage reduction in the stock price of these two groups right hand side t-statistic Panel A ： A base period covering one year prior to the date of reporting financial distress C-86.93%-59.89%-27.04%-4.90 *** C %-76.95%-15.35%-4.43 *** Panel B ： A base period covering half a year prior to the date of reporting financial distress C-83.32%-53.00%-30.32%-4.21 *** C %-72.74%-17.50%-3.93 *** Panel C ： A base period covering one quarter prior to the date of reporting financial distress C-78.81%-49.20%-29.61%-3.32 ** C %-70.56%-16.68%-2.83 ** Panel D ： A base period covering one month prior to the date of reporting financial distress C-70.19%-44.94%-25.25%-1.89 ** C %-68.26%-13.17%-1.42 *

Paired Comparisons among Three Groups The present study finds that the financial distress costs of the “delisting” group are largest, the financial distress costs of the “maintaining normal trading” group are lowest, and those of “cash transaction only/suspended trading” group fall somewhere in between. Empirical Analysis (7/7)

20 After collecting 104 TAIEX-listed financially distressed companies, the primary empirical findings are as follows Concerning the first research issue, for the entire sample, this study finds that the financially distressed companies during the period from the date of reporting financial distress in the press to 20 transaction days after the date of changing transaction mode have registered a huge reduction in stock price. As expected, the financially distressed companies are experiencing a continuous deterioration in the aggregate shareholder wealth of which the magnitude has reached statistical significance. Conclusions(1/2)

Conlusions(2/2) Concerning the second research issue the present study finds that the financial distress costs of the “delisting” group are largest, the financial distress costs of the “maintaining normal trading” group are lowest, and those of “cash transaction only/suspended trading” group fall somewhere in between. Accordingly, We have good reasons of thinking that the financial distress cost is substantially underreported in the literature because of underestimating reduction in asset value.

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