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

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  • Li, Yuanzhi
  • Zhong, Zhaodong (Ken)

Abstract

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.

Suggested Citation

  • Li, Yuanzhi & Zhong, Zhaodong (Ken), 2013. "Investing in Chapter 11 stocks: Trading, value, and performance," Journal of Financial Markets, Elsevier, vol. 16(1), pages 33-60.
    • Handle: RePEc:eee:finmar:v:16:y:2013:i:1:p:33-60
    DOI: 10.1016/j.finmar.2012.09.006
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    More about this item

    Keywords

    Chapter 11; Option theory; Heterogeneous beliefs; Limits to arbitrage;
    All these keywords.

    JEL classification:

    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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