When insiders and affiliated outsiders dominate the board's compensation committee, negative returns are more likely to occur than when independent outsiders control the committee. There is evidence of a positive relationship between institutional ownership and subsequent split behavior. A firm size effect emerges from the finding that larger firms have higher percentages of institutional owners. This implies that institutional investors either encourage stock split behavior or invest in firms that exhibit indicators of eminent stock splits. The evidence indicates that stockholders uncover the signs of financial distress long before the default date.
Stock prices fall sharply at the time of the default announcement.
Although stocks of fallen angel sample recover slowly and steadily after the default announcement, stocks of the original-issue junk bond sample continue to decline. However, the relationship between bond prices and interest rates is nonlinear, creating a convexity effect. Moreover, term structure changes often are nonparallel in nature, which causes imperfect hedges for the duration-based hedging model. A superior solution is to develop a two-instrument hedge ratio that simultaneously hedges both duration and convexity effects. The simulation results show that this duration-convexity hedge ratio is vastly superior to alternative hedge ratio methods for both simple and complex changes in the term structure.