Investing in Chapter 11 stocks: Trading, value, and performance

Yuanzhi Li and Zhaodong Zhong

Journal of Financial Markets, 2013, vol. 16, issue 1, 33-60

Abstract: We address questions about Chapter 11 stocks regarding their trading environment, fundamental value, and performance. First, there exists active trading for Chapter 11 stocks throughout the bankruptcy process. Second, equity value after filing is positively related to asset value, asset volatility, risk-free rate, and expected duration and is negatively related to liabilities. Furthermore, the return correlation between bankrupt stocks and their matching samples exhibits non-linearity similar to out-of-money call options. Third, investing in Chapter 11 stocks incurs large losses. Consistent with heterogeneous beliefs and limits to arbitrage, stocks with higher levels of information uncertainty and more binding short-sale constraints experience more negative returns.

Keywords: Chapter 11; Option theory; Heterogeneous beliefs; Limits to arbitrage (search for similar items in EconPapers)
JEL-codes: G12 G14 G33 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finmar:v:16:y:2013:i:1:p:33-60

DOI: 10.1016/j.finmar.2012.09.006

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