The Equity Performance of U.S. Firms Emerging from Chapter 11 Bankruptcy

Authors

  • Abu Towhid Muhammad Shaker PhD student (Finance), University of Vaasa.

DOI:

https://doi.org/10.18533/ijbsr.v4i1.381

Keywords:

Chapter 11, event study, Abnormal Return, Announcement effect.

Abstract

The aim of this study is to explore and assess the long-run stock return performance of the firms emerging from bankruptcy under Chapter 11 of the U.S. Bankruptcy Code using event study methodology in U.S. market. The abnormal return tests are executed for the full sample period 1994-2011 as well as two sub-sample periods of 1994-2006 and 2007-2011. Findings for the full sample period as well as first sub-sample period support substantial evidence of positive abnormal returns in short term as well as in long term. Several factors such as changing industrial code, state of incorporation and state of filing etc. are found to have significant effect on positive abnormal returns in the first sub-sample period. However, the results from the second sub-sample period exhibit mixed evidence of both positive and negative abnormal returns. Surprisingly, abnormal returns around the earnings announcements are also found significantly negative. The results from the second sub-sample period and around earnings announcements contradict the findings in previous studies which have documented highly positive abnormal returns for the companies emerging from bankruptcy.

References

Ahmad, A. H. and Hanita K. S. and Husni H. A., 2008. The Equity Performance of Malaysian

Companies Emerging from Financially Distressed Condition. International Journal of Business and Society, 9 (1), 103-114.

Alderson, M.J. and Betker, B. L.1999. Assessing Post-Bankruptcy Performance: An Analysis of

Reorganized Companies’ Cash Flows. Financial Management, 28, 68-82.

Andrade, G. and Kaplan, S.N., 1998. How Costly is Financial (Not Economic) Distress? Evidence

from Highly Leveraged Transactions that Became Distressed. Journal of Finance, 53(5), 1443-1494.

Ball, R. and Brown, P. 1968, An Empirical Evaluation of Accounting Numbers, Journal of

Accounting Research, 6, 159-178.

Brown, S. and Warner, .J., 1980. Measuring Security Price Performance. Journal of Financial

Economics, 8, 205-258.

Carapeto, Maria, 2005. Bankruptcy Bargaining with Outside Options and Strategic Delay.

Journal of Corporate Finance, 11, 736-746.

Cirmizi, E., Klapper, L. and Uttamchandani, M., 2010. The Challenges of

BankruptcyReform.The World Bank, Development Research Group, Finance and Private Sector Development Team. Available at:http://www-wds.worldbank.org/servlet/WDSContentServer/WDSP/IB/2010/10/18/000158349_20101018113213/Rendered/PDF/WPS5448.pdf[Accessed 20 April 2012].

Daines, R. 2001. Does Delaware Law Improve Firm Value?. Journal of Financial Economics,

, 525–58.

Eberhart, A., Aggarwal, R., and Altman, E. I., 1999. The Equity Performance of Firms Emerging

from Bankruptcy. The Journal of Finance, 54 (5), 1855–1868.

Eckbo, E. 2009. Bankruptcy as an Auction Process: Lessons from Sweden. Journal of Applied

Corporate Finance, 21(3).

Fama, E., F. 1969. The Adjustments of Stock Prices to New Information. International Economic

Review. 10(1) 1-21.

Gilson, S., T. 1997. Transactions Costs and Capital Structure Choice: Evidence from Financially

Distressed Firms. Journal of Finance, 52 (1), 161-196.

Giammarino, R., M. 1989. The Resolution of Financial Distress. The Review of Financial

Studies. 2, 25-47.

Goyal, A., Kahl, M. and Torous, W. 2003. The Long-Run Stock Performance of Financially

Distressed Firms: An Empirical Investigation,” Working Paper, University of North Carolina. (As cited in Hotchkiss et al)

Hotchkiss, E.S. 1995. Post bankruptcy Performance and Management Turnover. Journal of

Finance, 50 (1), 3-21.

Hotchkiss, E.S. and Mooradian, R.M., 1997. Vulture Investors and the Market for Control of

Distressed Firms. Journal of Financial Economics, 43, 401-432.

Hotchkiss, E.S., Mooradian, R.M., John K., Thorburn K.S., 2008.Handbook of Empirical

Corporate Finance, 2. ( Available at : http://mba.tuck.dartmouth.edu/Pages/Faculty/Karin.Thorburn/publications/Ch14-N53090.pdf) [Accessed 20 April 2012].

Hubbard, J. and Stephenson, K.,1997. Bankrupt Stocks, Reorganization Plans and Market Efficiency: Are Bankrupt Stocks Overpriced.The Quarterly Review of Economics and Finance, 37.

Jory, S. R. and Madhura J., 2010. The long-run Performance of Firms Emerging from Chapter 11

Bankruptcy. Applied Financial Economics, 20, 1145–1161.

Jory, S. R., 2010. Three Essays on Bankrupt Firms. ProQuest Dissertations and Theses.

Kalay, A., Singhal, R., and Tashjian, E. 2007. Is Chapter 11 Costly?. Journal of Financial

Economics 84, 772-796.

Kahl, Matthias, 2002, Economic Distress, Financial Distress, and Dynamic Liquidation. The Journal of Finance 57, 135-168.

Knif, J., Kolari, J. and Pynnonen, S., Cross-correlation Robust Tests of Long-Run Abnormal

Stock Returns in Event Studies. Available at: http://www.hecer.fi/Seminars/documents/Time_series/knif.pdf [Accessed 20 April 2013].

LoPucki, Lynn M., and Whitford W.1993. Patterns in the Bankruptcy Reorganization of Large

Publicly Held Companies. Cornell Law Review, 78, 597.

LoPucki, L. and Kalin, S. 2001. The Failure of Public Company Bankruptcies in Delaware and

New York: Empirical Evidence of A Race To The Bottom. Vanderbilt Law Review, 54, 231–82.

Maynes, E. and Rumsey, J. 1993. Conducting Event Studies with Thinly Traded Stocks. Journal

of Banking and Finance 17, 145-157.

Mooradian, Robert M., 1994. The Effect of Bankruptcy Protection on Investment: Chapter 11 as a

Screening Device. The Journal of Finance 49, 1403-1430.

Sandler, L. and Lowenstein, R., 1991. Post Bankruptcy Shares: Next Big Play? WallStreet

Journal, (Eastern Edition), 16(2).

Downloads

Published

2014-01-25

Issue

Section

Article