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The Behavior of the Common Stock of Bankrupt Firms

The Behavior of the Common Stock of Bankrupt Firms The Behavior of the Common Stock of Bankrupt Firms TRUMAN A. CLARK and MARK I. WEINSTEIN* I. Introduction THE ANNOUNCEMENT that a corporation has filed a petition in federal court to attempt a reorganization under the bankruptcy laws potentially conveys important information concerning the value and risk of its common shares. A bankruptcy announcement perhaps signals changes in the probabilities of alternative future share values (e.g., once bankruptcy is declared, the probability that the shares will become worthless possibly increases). A firm’s bankruptcy filing also possibly alters the market risk of its shares. What shareholders will receive in the event of reorganization or liquidation will be determined by a court. To the extent such legal decisions are insensitive to general market movements, perhaps the market risk of the firm’s shares is reduced. It could be the case that most corporate bankruptices are so fully anticipated that little or no new information is released when bankruptcies are filed. Casual observation suggests that major corporate bankruptcies do not come as complete surprises. Trading in listed stocks usually is halted some time before bankruptcy filings. Stories that a corporation is about to file a bankruptcy petition sometimes appear in the financial http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Finance Wiley

The Behavior of the Common Stock of Bankrupt Firms

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References (3)

Publisher
Wiley
Copyright
1983 The American Finance Association
ISSN
0022-1082
eISSN
1540-6261
DOI
10.1111/j.1540-6261.1983.tb02257.x
Publisher site
See Article on Publisher Site

Abstract

The Behavior of the Common Stock of Bankrupt Firms TRUMAN A. CLARK and MARK I. WEINSTEIN* I. Introduction THE ANNOUNCEMENT that a corporation has filed a petition in federal court to attempt a reorganization under the bankruptcy laws potentially conveys important information concerning the value and risk of its common shares. A bankruptcy announcement perhaps signals changes in the probabilities of alternative future share values (e.g., once bankruptcy is declared, the probability that the shares will become worthless possibly increases). A firm’s bankruptcy filing also possibly alters the market risk of its shares. What shareholders will receive in the event of reorganization or liquidation will be determined by a court. To the extent such legal decisions are insensitive to general market movements, perhaps the market risk of the firm’s shares is reduced. It could be the case that most corporate bankruptices are so fully anticipated that little or no new information is released when bankruptcies are filed. Casual observation suggests that major corporate bankruptcies do not come as complete surprises. Trading in listed stocks usually is halted some time before bankruptcy filings. Stories that a corporation is about to file a bankruptcy petition sometimes appear in the financial

Journal

The Journal of FinanceWiley

Published: May 1, 1983

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