Abstract

This paper examines the behavior of 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 firm’s bankruptcy filing. Using a matched sample based on year, industry and probability of future bankruptcy, we find that corporate insiders display reduced net trading activity in the quarters before bankruptcy. In contrast, we find that our identified groups of institutional shareholders display abnormal selling activity several quarters before bankruptcy. We then use this information to enhance the predictive capabilities of Campbell et al.’s (2008) bankruptcy model and find the variables measuring the absolute value of net purchases by corporate insiders along with the changes in ownership by specific groups of institutional shareholders improves the predictive capabilities of the Campbell et al (2008) bankruptcy prediction model.

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