Luis Coelho

The Financial Impact of a Withdrawn ISO 9001 Certificate

Purpose – The purpose of this paper is to assess to what extent the loss of the ISO 9001 certification affects the decertified firms’ financial performance. Design/methodology/approach – Using standard event-study methods, this paper matches a sample of 143 Portuguese companies that lost their ISO 9001 certification with similar non-event counterpart firms (according to return-on-assets and size) and compares the performance of these two groups of firms using financial data collected from the AMADEUS database. Findings – Results show no statistical significant differences in the financial performance (as measured by return-on-assets, return-on-sales, and sales growth) between companies that lost their ISO 9001 certification and their matched firms. Although the literature suggests that certification improves firms’ performance and that the benefits of certification may last over long periods of time, this paper’s results suggest that, after decertification, companies do not exhibit over or underperformance in their operations vis-a-vis comparable firms that do not undergo the same event. Originality/value – As far as the authors are aware, this is the first study assessing the impact of ISO 9001 certificate withdrawal on the decertified firms’ financial performance.

Utility function estimation: The entropy approach

The maximum entropy principle can be used to assign utility values when only partial information is available about the decision maker’s preferences. In order to obtain such utility values it is necessary to establish an analogy between probability and utility through the notion of a utility density function. In this paper we explore the maximum entropy principle to estimate the utility function of a risk averse decision maker.

Bankrupt Firms: Who's Buying?

This paper asks whether the stocks of bankrupt firms are correctly priced, and explores who trades the stocks of these firms, and why. We show that firms in Chapter 11 are heavily traded by retail investors who are also their main shareholders. We further demonstrate that the stocks of these firms have unique lottery-like characteristics, and that retail investors apparently trade in such stocks as if they were gambling on the market. Considering the price impact of this investor behavior we document that buying and holding such securities leads, on average, to a negative realized abnormal return of at least -28% over the 12-month post-announcement period, a result inconsistent with traditional asset pricing models. However, examining how arbitrageurs might exploit this apparent market pricing anomaly, we find they have little incentive to intervene in this particular market: implementation costs and risks are simply too high. We thus conclude that a combination of gambling-motivated trading by retail investors and limits to arbitrage seems to lead to the apparent market pricing paradox we document. Our paper thus provides a clear answer to Eugene Fama and Kenneth French’s recent question on their blog - “Bankrupt Firms: Who’s Buying?”.

Exponential Regression of Fractional-Response Fixed-Effects Models with an Application to Firm Capital Structure

Abstract New fixed-effects estimators are proposed for logit and complementary loglog fractional regression models. The standard specifications of these models are transformed into a form of exponential regression with multiplicative individual effects and time-variant heterogeneity, from which four alternative estimators that do not require assumptions on the distribution of the unobservables are proposed. All new estimators are robust to both time-variant and time-invariant heterogeneity and can accomodate fractional responses with observations at the boundary value of zero. Additionally, some of these estimators can be applied to dynamic panel data models and can accommodate endogenous explanatory variables without requiring the specification of a reduced form model. A Monte Carlo study and an application to firm capital structure choices illustrate the usefulness of the suggested estimators.

Estimating utility functions using generalized maximum entropy

This paper estimates von Neumann and Morgenstern utility functions using the generalized maximum entropy (GME), applied to data obtained by utility elicitation methods. Given the statistical advantages of this approach, we provide a comparison of the performance of the GME estimator with ordinary least square (OLS) in a real data small sample setup. The results confirm the ones obtained for small samples through Monte Carlo simulations. The difference between the two estimators is small and it decreases as the width of the parameter support vector increases. Moreover, the GME estimator is more precise than the OLS one. Overall, the results suggest that GME is an interesting alternative to OLS in the estimation of utility functions when data are generated by utility elicitation methods.

Bankruptcy Abuse Prevention and Consumer Protection Act: Friend or Foe?

In 2005, the U.S. Bankruptcy Law suffered major adjustments with the passing of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). In this paper, I explore the market pricing implications of this change. There is evidence that, in the pre-bankruptcy period, the risk-adjusted stock price performance is very similar whether the case is initiated under the BAPCPA or its predecessor, the Bankruptcy Reform Act of 1978. The market reaction to the formal announcement of bankruptcy is, however, much more negative after the enactment of BAPCPA. My results stress the interaction between law and finance and have important consequences for both investors and managers, which I discuss in the body of the paper.

Excellence in Tourism Destinations

In an environment of businesses globalisation and increasing international competitiveness, it seems like most tourism growing or mature destinations are trying to develop and implement strategies that shall ensure a clear orientation towards the satisfaction of the clients’ needs and expectations, ensuring at the same time a balanced management of the different resources, aims and interest present. The implementation of the integrated quality management in the tourism destinations while advocating a different view for the operation and the development of the sector and wanting the introduction of new approaches and methodologies, is accomplished through the setting of aims of cooperation, understanding of the needs and expectations of the visitors, setting of standards, collecting the visitors’ reactions, executing improvement actions and monitoring the results obtained. Besides these concerns, there is also the issue of the network of heterogeneous organisations in the public and private sectors that require interaction to efficiently and effectively meet the consumers’ needs and expectations, minimising the potential negative impacts on the potential negative sociocultural, economic and ecological impacts in the host community. The main research purpose of this chapter is to define an assessment methodology that allows the quantification of quality in the tourism destinations. This is based on an approach focused on the self-assessment process developed by the managers of the Destinations Management Organisations and other organisations, which, with more or less protagonism, monitor the integrated quality management in the tourism destinations. The chapter analyses the different phases and steps that must be the basis for the implementation of an integrated quality management process in the tourism destinations and proposes concrete ways of applying the methodology on the ground, in order to achieve the optimization of the satisfaction of the participants in the process of provision and consumption of tourist services, the valorisation of the tourism experience and the improvement of the competitive positioning of the tourism destinations.

Bad News Do Not Always Travel Slowly: The Bankruptcy Case

This paper tests to what extent the Hong and Stein (1999) model explains the stock price performance of firms filing for Chapter 11 bankruptcy. In line with the model’s main prediction, I find that the market severely misprices (correctly prices) the bankrupt firms for which information is likely to diffuse slowly (rapidly) across investors. My key finding is robust to a range of alternative methods for adjusting for risk and different periods for computing the abnormal stock returns. My innovative framework provides an acid test of the predictive ability of the Hong and Stein (1999) model, with my results suggesting that it offers important insight into the workings of financial markets, even in the very extreme setting I consider.

Does the Market Know Better? The Case of Strategic vs. Non-Strategic Bankruptcies

This paper explores the market response to two apparently similar but in fact very different firm-specific bad-news events: 1) filing a strategic Chapter 11, and 2) filing a financially-motivated Chapter 11. We find that the market is unable to distinguish between the two in both the pre-event, and bankruptcy filing event, periods. In particular, in both cases, prices drop by around a half in risk-adjusted terms in the one-year pre-event window, falling a further 25% around the event date. On the other hand, we find that the subsequent market reaction to the announcement of strategic and non-strategic Chapter 11s is quite different. For non-strategic bankruptcies, there is a post-event drift of around -29% over the subsequent 12-months. Conversely, in the case of strategic bankruptcies, we uncover a reversal in the stock return pattern: risk-adjusted abnormal returns are now of 29% in the 6-month period following the event date. As such, filing for Court protection against creditors for non-strategic reasons seems to be increasingly perceived by the market as bad news over time, while filing a strategic bankruptcy becomes recognized over time as a positive news event. Complementary analysis reveals that a mix of behavioral biases, information uncertainty and the trading environment may well help explain our puzzling results.