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Prior Wall Street Journal Announcements of Possible Bankruptcy Filings and Price Reactions to Subsequent Bankruptcy Filings

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  • Mark C. Dawkins
  • Ena Rose‐Green

Abstract

This study examines the relation between prior Wall Street Journal (WSJ) announcements of possible bankruptcy filings and price reactions to subsequent bankruptcy filings for 336 firms that filed for bankruptcy between 1980 and 1993. Extant research indicates that price reactions to announcements of economic events are inversely related to the amount of surprise in the announcements. Prior WSJ anouncements of possible bankruptcy filings increase the markets a priori assessment of firms' probability of bankruptcy, thereby potentially reducing the surprise in subsequent bankruptcy filings. We hypothesize smaller price reactions to bankruptcy filings for firms where the WSJ previously published an article indicating that the firm may file for bankruptcy. Our results are consistent with this hypothesis. Specifically, we find smaller price reactions to bankruptcy filings for firms with prior WSJ announcements of possible bankruptcy filings. Our results hold after controlling for firm size, probability of bankruptcy, exchange listing, leverage, and predisclosure information.

Suggested Citation

  • Mark C. Dawkins & Ena Rose‐Green, 1998. "Prior Wall Street Journal Announcements of Possible Bankruptcy Filings and Price Reactions to Subsequent Bankruptcy Filings," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 25(7‐8), pages 813-827, September.
    • Handle: RePEc:bla:jbfnac:v:25:y:1998:i:7-8:p:813-827
    DOI: 10.1111/1468-5957.00214
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