Stock price reaction to an arrangement approval in restructuring proceedings – the case of Poland

Elon Musk's recent statements about accepting Dogecoin and not accepting Bitcoin as a form of payment for Tesla's products have reverberated through capital markets. His statements resulted in a significant change in the prices of these cryptocurrencies [Iyengar, 2021; Thorbecke, 2022]. This example shows that the disclosure of certain information can materially affect the prices of financial instruments. It is not an isolated case, and the number of events that impact the capital market returns studied by scholars continues to grow [Binder, 1998; Corrado, 2011; Wang and Ngai, 2020]. The origins of event analysis date back to the 1930s [Sorokina et al., 2013], whereas advanced methodology for this form of study was proposed by Fama et al. [1969] in an article entitled The Adjustment of Stock Prices to New Information, and it was further developed by many researchers [Brown and Warner, 1980, 1985; Dyckman et al., 1984]. Apart from the price reactions of different assets in capital markets to the events, the analysis also covers the events’ impact on the volatility of the prices as well as their trading volume and liquidity [Yadav, 1992; Essaddam and Mnasri, 2015; Gurgul, 2020; Tweneboah-Koduah et al., 2020; Yue, 2021]. The studies examine the impact of positive, negative, and false event announcements on the above-mentioned variables. Due to their large number, it is difficult to specify all the events analyzed so far. They include, for example, fake news [Clarke et al., 2019], publishing information regarding stock exchange recommendations [Liu et al., 1990], mergers [Keown and Pinkerton, 1981; Rosen, 2006], profits [De Bondt, 2000, pp. 71–81], stock splits [Gulen and Hwang, 2012], planned dividend payments [Michaely et al., 1995], corporate strategy, customers and partners, products and services, management changes, legal developments [Neuhierl et al., 2013], unexpected deaths of senior corporate executives [Johnson et al., 1985], corporate governance [Brogi and Lagasio, 2018], frauds [Sharma and Verma, 2020], R&D process [Perez-Rodriguez and Valcarcel, 2012], daily coronavirus confirmed cases and deaths [Ashraf, 2020], corporate social responsibility (CSR) [Pérez et al., 2020], voluntary integrated report publication [Nakajima and Inaba, 2021], and information security events [Ali et al., 2021], as well as changes in environmental policies and regulations in the US during Donald Trump's presidency [Nerger et al., 2021], coronavirus outbreak [Liu et al., 2020; Mirza et al., 2020; Singh et al., 2020], terrorist attacks [Tahir et al., 2020], and environmental pollution [Bouzzine, 2021]. The impact of these events was examined at different time intervals, i.e., seconds, minutes, days, months, or years [Kothari and Warner, 2007; Dutta and Dutta, 2015; Mazza, 2015; Lalwani et al., 2019].

In addition to the above-mentioned circumstances, significant events, which directly affect many companies and impact their results, are related to bankruptcy and restructuring proceedings. Within these proceedings, it is possible to identify many key moments and communications about them that significantly impact the value of companies. These include, for example, filing for the initiation of bankruptcy or restructuring proceedings, dismissal of the bankruptcy or restructuring application by a court, concluding a debtor–creditor arrangement under restructuring proceedings, executing an arrangement, etc. The literature on the subject includes analyses of price reactions only to some of the above events and only to a limited extent. However, no research shows whether and to what extent concluding a debtor–creditor arrangement affects the rate of return on stocks of public companies. It is worth mentioning here that the implementation of the agreement requires the realization of three minor stages, namely: conclusion of a debtor–creditor arrangement, court approval of the arrangement, and arrangement approval becoming final. These events are a crucial part of the restructuring process, and they are necessary but not sufficient to restructure the company successfully. In our opinion, the lack of studies on this topic constitutes a research gap that this paper fills. The proposed research objective is to identify stock price reactions to the conclusion and acceptance of an arrangement under restructuring proceedings of companies listed on the Polish stock market. Companies listed on the main market of the Warsaw Stock Exchange and on Newconnect, which is a market for smaller entities, were included. Due to the lack of access to a wider database, the research was limited to companies listed on the stock exchange in Poland. However, in terms of capitalization, the Polish capital market is one of the largest after Russia among the post-communist countries in Central and Eastern Europe [FESE, 2021]. Because entering into an arrangement in restructuring proceedings is positive information for investors, the following main research hypothesis was proposed: public disclosure of information about the conclusion and acceptance of an arrangement in restructuring proceedings results in above-average rates of return due to investments in the stocks of these entities in the short term. The studies were conducted using daily time intervals. The research method used was event studies, and information about the arrangements was obtained from Electronic System for Information Transmission (ESPI) between October 2004 and June 2021.

Besides the introduction, the paper structure is as follows. The second section outlines the theoretical background. It presents the directions of bankruptcy and restructuring law changes in Poland and the EU. Moreover, it contains information on regulations and statistics concerning bankruptcy and restructuring in Poland and depicts concluding and accepting an arrangement. The key role of an arrangement between a debtor and creditors in the successful restructuring of a company is underlined, which can significantly impact the business value. It also presents the results of previous event studies concerning bankruptcy and restructuring processes in Poland and abroad. The third section presents the methodology with particular reference to the description of the event analysis method used in the study. The fourth section presents the research results. The final section discusses the findings, limitations, and implications of the research.

In the 21st century, EU countries, among others, launched initiatives to implement the second chance policy. These initiatives are described in many documents and legal acts, among which we can mention: Overcoming the Stigma of Business Failure – for a Second Chance Policy. Implementing the Lisbon Partnership for Growth and Jobs [2007]; Think Small First. A Small Business Act for Europe [2008]; Business Dynamics: Start-ups, Business Transfers and Bankruptcy. The Economic Impact of Legal and Administrative Procedures for Licensing, Business Transfers and Bankruptcy on Entrepreneurship in Europe [2011]; Report of the Expert Group: A Second Chance for Entrepreneurs: Prevention of Bankruptcy, Simplification of Bankruptcy Procedures and Support for a Fresh Start [2011]; Commission Recommendation of 12 March 2014 on a New Approach to Business Failure and Insolvency [2014]; Entrepreneurship 2020. Action Plan. Reigniting the Entrepreneurial Spirit in Europe [2013]. A key role in carrying out this policy is played by regulations and institutions that impact the effectiveness of business restructuring. Initiating corrective actions in the early stage of a crisis and allowing a continuation of business activity rather than its closure often contributes to maintaining jobs and has a positive impact on the economy [Falke, 2002; Hausemer et al., 2016; Kilborn, 2016, p. 583; Graham et al., 2019]. It also improves the financial health of companies and increases their value. However, this does not mean that every distressed company should be restructured. At the initial stage of proceedings, it is important to separate those entities that can improve their financial condition from those that do not show such promise. In the latter case, it is advisable to liquidate them. In order to improve actions for the implementation of the second chance policy in the EU countries, including among others, improvement of the effectiveness of restructuring proceedings, Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019 on preventive restructuring frameworks, on discharge of debt and disqualifications, and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt was adopted. Despite steps taken to harmonize legislation, regulations on bankruptcy and restructuring are not uniform in the EU Member States and other countries [Newman, 2021]. In some states, provisions concerning bankruptcy and restructuring proceedings constitute a single legal act, while in others, they are regulated in two different ones. In addition, there are several recovery solutions adjusted to the requirements of individual countries. Hence, it can be seen that specific regulations are proposed for smaller and larger companies and different types of business entities (e.g., banks, insurers), depending on the financial condition of the entity. These regulations also differ, inter alia, in areas such as seniority of claims, voting rules on the agreement, the required majority for approval of the agreement, the appointment of creditors’ committee, cramdown policy, new financing rules, the position of management, personal liability of directors, and release from debts [Clifford Chance, 2019; Restructuring & Insolvency/Chapters, 2022].

In Poland, several types of restructuring proceedings can be distinguished depending on the level of court involvement and complexity, among other things. Thus, there are proceedings where the entire procedure takes place out of court and those where the court's influence on the course of the recovery procedure varies – from full control to the court's activity limited to approving an arrangement, stating its execution or discontinuance [McCormack et al., 2016; Morawska et al., 2020]. After World War II, when Poland had a planned economy, the Polish bankruptcy and composition law was practically dead. However, formally relevant regulations existed from 1934, i.e., the Regulation of the President of the Republic of Poland of 24 October 1934a, Bankruptcy Law and the Regulation of the President of the Republic of Poland of 24 October 1934b, Law on Composition Proceedings. Only after the initiation of economic transformation, starting from 1990, did bankruptcy and composition proceedings begin to be conducted under the 1934 regulations. These regulations applied until 2003, when a new bankruptcy and reorganization law was introduced [Bankruptcy and Reorganisation Act of 28 February 2003]. This law, with amendments, continued to be in force until the end of 2015. It provided for three basic proceedings, i.e. liquidation, composition, and recovery. The first two were intended for insolvent entities and the last for entities at risk of insolvency. After it was in force for several years, it turned out that this law did not work in practice, i.e., the proceedings were very long and costly and the number of arrangements small. Recovery proceedings were rare. Hence, a new restructuring law [Restructuring Act of 15 May 2015] came into force from the beginning of 2016. Since then, bankruptcy proceedings have been governed by the above-mentioned 2003 act, while the restructuring law provides for several procedures of a corrective nature that differ in terms of court intervention and the degree of formalization.

As shown in Figure 1, the grounds for initiating a recovery procedure are insolvency or the risk of insolvency. Proceedings for the approval of an arrangement are among the least formalized. Most actions take place out of court. The debtor negotiates independently with their creditors to conclude an arrangement. The court only decides whether to approve such an arrangement. Other proceedings take place with greater court involvement. Accelerated composition proceedings are less formal than composition proceedings. Moreover, the latter concern a larger number of disputed receivables. Of all restructuring proceedings, recovery proceedings are among the most complex and involve the greatest influence of the court and the appointed supervisor on its course. However, they make it possible to restructure the debtor's company using more advanced restructuring measures than other proceedings. It also guarantees the greatest protection from creditors. During the COVID-19 pandemic, an additional temporary solution was introduced in the form of simplified arrangement approval proceedings (simplified restructuring proceedings), the provisions of which were in force until November 30, 2021 [Act of 19 June 2020 on Subsidisation of Interest on Bank Loans Granted to Entities Affected by COVID-19 and Simplified Arrangement Approval Proceedings Due to COVID-19, as amended]. These proceedings were conducted almost entirely out of court, with a 4-month maximum time limit for an arrangement.

Figure 1

One of the key steps in all restructuring proceedings is concluding a debtor–creditor arrangement and its acceptance by a court. Figure 2 shows the main stages of successful composition proceedings.

Figure 2

In the first stage, arrangement proposals are presented, and negotiations are held between the debtor and the creditors. Arrangement approval requires obtaining a legal majority as measured by both the number of votes and the value of the receivables. After the arrangement is concluded, the participants in the composition proceedings may report objections. After considering these objections and verifying the legality of the arrangement, the court approves or rejects it. The court's decision may be appealed. The final element required is the decision on the arrangement approval to become final. In the next stages, the company takes corrective actions and, at the same time, implements the provisions of the composition agreement. Successful proceedings end with the execution of the arrangement. If there are any problems with implementing the arrangement, the law provides a procedure for amending it. If the arrangement amendment is not effected or the circumstances indicate that it will not be executed, the arrangement is revoked and expires. Such situations often result in a declaration of bankruptcy.

One of the main problems in Poland was the relatively small share of insolvent companies that used legal bankruptcy and reorganization procedures, including a very low share of restructuring companies in relation to liquidated units. As shown in Table 1, it was not until the introduction of the new restructuring law and the simplified restructuring proceedings due to the COVID-19 pandemic that this trend was reversed. However, given the new law has been in force for a short time, it is difficult to accurately assess these changes for now, as many of the existing composition procedures have not been successful, and a large portion of the procedures is not finished yet [Zaremba, 2020].

There has not been much research using event analysis that would address bankruptcy and restructuring processes in the existing literature on the subject. For example, Clark and Weinstein [1983] and Schatzberg and Reiber [1992] reported a short-term stock price reversal effect following the publication of information about filing for the initiation of recovery proceedings in the US, i.e., significant drops in prices over the filing period were followed by an abnormal return rate. A similar effect was demonstrated by Datta and Iskander-Datta [1995], and Dawkins et al. [2007]. Coelho and Taffler [2008] studied the long-term impact of filing for a recovery procedure in the US. It turned out that 12 months later, the average abnormal return (AAR) rate was negative. Rose-Green and Dawkins [2000] revealed that companies initiating liquidation bankruptcy proceedings achieved larger price drops than companies filing for recovery proceedings. Meanwhile, Bonnier and Bruner [1989] showed that providing information about management board changes in distressed companies generates short-term positive price changes. Moreover, Chen and Church [1996] concluded that companies applying the going concern assumption achieved less negative returns than companies not doing so when the bankruptcy filing was made public. In addition to the above studies on listed companies in the US, analyses on the Malaysian and Polish markets were also conducted. In Malaysia, companies reporting bankruptcy generated a negative abnormal return in the short term. Furthermore, re-emerged firms experienced significantly less negative abnormal returns compared to delisted ones [Ahmad et al., 2016]. Similar observations were true to the Polish capital market – stock prices reacted negatively in the short term to the information about filing for liquidation bankruptcy or restructuring. However, the reaction was more severe in the case of companies filing for liquidation bankruptcy. It is worth mentioning that higher negative above-average returns were reported for companies listed on the less liquid stock market [Prusak and Potrykus, 2021a]. Another study concerned the reaction of stock prices to involuntary bankruptcies filed by creditors in bad faith. The study revealed that information about these applications did not generate negative above-average returns in the short term [Prusak and Potrykus, 2020].

The literature analysis shows that there is little research on price reactions to bankruptcy and restructuring processes. Most studies were devoted to analyzing the price reactions to the public disclosure of information about filing bankruptcy or restructuring. No research on stock price reactions to the news of arrangement that accounts for the success of the corporate recovery process has been carried out so far. The conclusion of an agreement between the debtor and the creditors is necessary for a successful restructuring. However, an arrangement often involves parties with different objectives and expectations, and diverse access to information. In addition, in many legal orders, we have to deal with so-called privileged claims and claims secured by the debtor's assets, making it even more challenging to reach a compromise [McCormack, 2017]. In the literature, this problem is extensively presented within the framework of contract theory, which examines the conclusion of formal and informal contracts by parties representing diverse interests and with different levels of information [Jackson, 1982; Schwartz, 1998; von Thadden et al., 2010; Lipson, 2016; Adler and Triantis, 2017; Silva and Saito, 2018; Skeel, 2020; Warren et al., 2021]. Furthermore, the creditors’ vote on the arrangement is preceded by many analyses and valuations included in the restructuring plan. An agreement between the various creditor groups and the debtor on the shape of the arrangement may constitute positive information for investors [Chen et al., 1995; Garrido et al., 2021, pp. 16–25]. Consequently, on the grounds of signaling theory [Yasar et al., 2020], this positive information should therefore translate into higher stock prices in the short term. This assumption forms the basis for the hypotheses used in this study, which have been presented below. In the longer term, stock valuation is determined by a number of factors affecting the degree of implementation of the restructuring plan, which provides a benchmark in evaluating the company's operations and valuation.

Given that, the following main research hypothesis was proposed: public disclosure of the information about an arrangement conclusion and approval in restructuring proceedings results in above-average rates of return on stocks in the short term. As presented in Figure 2, concluding and approving a debtor–creditor arrangement consists of several steps. Successful completion of each stage involves positive information for the restructured entity. With this in mind, the following auxiliary hypotheses were proposed to verify the main hypothesis:

Our study contributes to the literature in three aspects. First, this study confirmed that in the analyzed companies, the public disclosure of information about entering into the arrangement in restructuring proceedings leads to an above-average and statistically significant increase in stock prices on the day of the event (confirmation of H1P). The same pattern was confirmed in the case of the public disclosure of information about the approval of an arrangement in restructuring proceedings becoming final (confirmation of H3P). In contrast, no statistically significant above-average rates of return were found for the second event analyzed, i.e., the public disclosure of information about the court approval of an arrangement (rejection of H2P). The market approaches such information as a mere formality that has no impact on stock price changes. This means that disclosing information about an arrangement positively impacts the rate of return on investment in the restructured companies in the short term, i.e., on the day of the event. Therefore, the main hypothesis is confirmed.

Second, the highest rates of return were found for the third analyzed event, for which the daily above-average returns were over 5% for all investigated companies and 9.6% for companies whose information was made public during the session. Moreover, the cumulative rate of return for the first two specified events was negative, which the authors of the present study attribute to the occurrence of the short-term reversal effect, the same that was demonstrated in Clark and Weinstein [1983], Schatzberg and Reiber [1992], Datta and Iskander-Datta [1995], and Dawkins et al. [2007]. In contrast, the cumulative above-average return for the third event analyzed was high and positive. Therefore, the completion of the restructuring process when the approval of the arrangement becomes final generates a clear signal for investors to purchase stocks of a given company.

Third, it was found that there were significant differences in the duration of the individual stages of the process analyzed. It was demonstrated that there is considerable room for shortening the legal proceedings, especially the interval between the court approval of an arrangement and this decision becoming final. What is surprising here is the significant variability of the results, expressed by a high standard deviation for the time between Events No. 1 and 2 and between Events No. 2 and 3.

Based on that contribution, we formulated the following implications, which we expect would be valuable for company managers and investors. Company managers should be aware that giving information about any step of restructuring proceedings to the public results in higher movement in company stock price when it is given outside the session. When company managers want to avoid extremely high rates of returns on their shares, they should take care to give all information about the analyzed process during an active session. Based on our conclusions, investors can formulate profitability investment strategies dedicated to companies that go through restructuring proceedings. On the day of the event (Events No. 1 and 3), a good strategy is to buy such shares and sell them at the end of that session for Event No. 1. For Event No. 3, selling should take place in a short-time period, i.e., a maximum of 4 days. In a short period, for Events No. 1 and 2, a short selling strategy is also desired. This is applicable especially in a window (2,4) for Event No. 1, and on the first and fourth day after the event for Event No. 2.

In addition, and this is distinct in the context of previous research, no significant differences were revealed in the results for the cumulative above-average return for events that occurred during the active trading session and the events that were made public outside the active trading session, which was true for all three examined situations. However, such a distribution of the study sample calls for expanded research in the future, as the number of subsamples (especially for the cases outside the session) was relatively small. Moreover, after considering more cases, the study could be supplemented with an analysis of intervals shorter than daily, e.g., minutes. Depending on data availability, which is a major limitation, it may also be possible to perform analogous analyses for other countries and compare the results. The next steps of the research may also include studies to assess the reaction of stock prices to negative information, such as a failure to conclude a debtor–creditor arrangement. In a further stage, the authors also intend to compare the impact of information about concluding an arrangement or failure to do so on stock prices.