Contagion and competitive effects of plan confirmation of reorganization filings: Evidence from the Taiwan Stock Market

a r t i c l e i n f o This paper aims to examine the intra-industry effects of confirmation of a reorganization plan. Using unique Taiwanese data on announcements of reorganization confirmation, I find evidence that such announcements elicit positive stock price reactions for the announcing firms and negative stock price reactions for other firms within the same industry. Specifically, negative competitive effects dominate positive contagion effects for industry rivals in the context of the announcement of a reorganization confirmation. Moreover, a hybrid neuro-fuzzy model is constructed, where five industry-and firm-level inputs are considered, to investigate which rivals enhance their position and which do not. Results show that my model is consistent and stable, and is good at classifying both contagion-and competitive-effect candidates. In recent years, increasing importance has been attached to research into the intra-industry wealth effect of bankruptcy announcements in the accounting and finance field, and such research has consistently pointed to an association between the equity value of firms announcing information and that of non-announcing firms within the same industry. This association, known as the contagion and competitive effect or information transfer effect, has been documented in different contexts. Warner (1977) examines the contagion effects of bankruptcy announcements in the railroad industry, while Aharony and Swary (1983), Diamond and Dybvig (1983), and Gorton (1985) investigate the contagion in the banking industry brought about by the failure of an individual bank. According to the signaling hypothesis, investors use bankruptcy announcements by a firm to make inferences about its industry counterparts, since such announcements imply industry-wide cash flow problems and suggest that rival firms will be affected in the same manner as the announcing firm (contagion effects). That is, the worsening situation of the deteriorated factors could signal an adverse condition of the applicable industry as a whole, and, hence, investors may also expect downward prospects for other firms that operate in the same industry. Empirical studies by Lang and Stulz (1992) and Ferris et al. (1997), which focus on intra-industry stock price responses to Chapter 11 bankruptcy filings, and Cheng and McDonald (1996), which emphasize the stock price reactions to bankruptcy of surviving firms in the airline and railroad industries, support this hypothesis by stating that the announcements of bankruptcy filing have significantly negative implications not only for the announcing firm's investors, but for investors in industry-related firms. In addition to the contagion effect, past studies …