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

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,...

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Bibliographic Details
Published in:Journal of financial markets (Amsterdam, Netherlands) Netherlands), 2013-02, Vol.16 (1), p.33-60
Main Authors: Li, Yuanzhi, Zhong, Zhaodong (Ken)
Format: Article
Language:English
Subjects:
Chapter 11
Heterogeneous beliefs
Limits to arbitrage
Option theory
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Summary: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. ► Document active trading for Chapter 11 stocks throughout the bankruptcy process. ► Equity value after Chapter 11 filing can be explained by the option theory. ► Return correlation exhibits non-linearity similar to out-of-money call options. ► Investing in Chapter 11 stocks incurs large losses. ► Negative return is consistent with heterogeneous beliefs and limits to arbitrage.
ISSN:1386-4181
1878-576X
DOI:10.1016/j.finmar.2012.09.006