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Does gradual diffusion of information really matters: The bankruptcy case

Author

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  • Luís M. S. Coelho

    (School of Economics - University of the Algarve and CEFAGE)

Abstract

This paper tests to what extent the Hong and Stein (1999) model explains the stock price performance of firms filing for Chapter 11 bankruptcy. In line with the model’s main prediction, I find that the market severely misprices (correctly prices) the bankrupt firms for which information is likely to diffuse slowly (rapidly) across investors. My key finding is robust to a range of alternative methods for adjusting for risk and different periods for computing the abnormal stock returns. My innovative framework provides an acid test of the predictive ability of the Hong and Stein (1999) model, with my results suggesting that it offers important insight into the workings of financial markets, even in the very extreme setting I consider.

Suggested Citation

  • Luís M. S. Coelho, 2011. "Does gradual diffusion of information really matters: The bankruptcy case," CEFAGE-UE Working Papers 2011_12, University of Evora, CEFAGE-UE (Portugal).
    • Handle: RePEc:cfe:wpcefa:2011_12
    as

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    File URL: http://www.cefage.uevora.pt/en/content/download/2600/35550/version/1/file/2011_12.pdf
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    References listed on IDEAS

    as
    1. Mark T. Bradshaw & Scott A. Richardson & Richard G. Sloan, 2001. "Do Analysts and Auditors Use Information in Accruals?," Journal of Accounting Research, Wiley Blackwell, vol. 39(1), pages 45-74, June.
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    More about this item

    Keywords

    Corporate Bankruptcy; Gradual Diffusion of Information; Event Study; Behavioral Binance Models.;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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