Investor ignorance in markets for worthless stocks

Palani-Rajan Kadapakkam and Hongxian Zhang

Journal of Financial Markets, 2014, vol. 19, issue C, 197-218

Abstract: We examine stocks of bankrupt firms after the court confirms they will receive nothing. While trading volume is negligible for most worthless stocks, some have sizable trading volume, indicating investor ignorance of their zero intrinsic value. Prices respond irrationally to news in several instances, and they are higher for more liquid worthless stocks, which are more likely to attract uninformed investors. Our analysis includes the first empirical examination of short-selling in bankrupt firms. Short-covering cannot account for the anomalous price and trading volume. Short-sellers are active in these stocks and play a useful role in pushing prices down toward intrinsic value.

Keywords: Investor irrationality; Worthless stocks; Bankrupt firm stocks (search for similar items in EconPapers)
JEL-codes: G14 G33 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finmar:v:19:y:2014:i:c:p:197-218

DOI: 10.1016/j.finmar.2014.01.001

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