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Investor ignorance in markets for worthless stocks

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  • Kadapakkam, Palani-Rajan
  • Zhang, Hongxian

Abstract

We examine stocks of bankrupt firms after the court confirms they will receive nothing. While trading volume is negligible for most worthless stocks, some have sizable trading volume, indicating investor ignorance of their zero intrinsic value. Prices respond irrationally to news in several instances, and they are higher for more liquid worthless stocks, which are more likely to attract uninformed investors. Our analysis includes the first empirical examination of short-selling in bankrupt firms. Short-covering cannot account for the anomalous price and trading volume. Short-sellers are active in these stocks and play a useful role in pushing prices down toward intrinsic value.

Suggested Citation

  • Kadapakkam, Palani-Rajan & Zhang, Hongxian, 2014. "Investor ignorance in markets for worthless stocks," Journal of Financial Markets, Elsevier, vol. 19(C), pages 197-218.
    • Handle: RePEc:eee:finmar:v:19:y:2014:i:c:p:197-218
    DOI: 10.1016/j.finmar.2014.01.001
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    Cited by:

    1. Maggie Hao & Dana A. Forgione & Liang Guo & Hongxian Zhang, 2017. "Improvement in clinical trial disclosures and analysts’ forecast accuracy: evidence from the pharmaceutical industry," Review of Quantitative Finance and Accounting, Springer, vol. 49(3), pages 785-810, October.
    2. Hongxian Zhang & Liang Guo & Maggie Hao, 2018. "Corruption, governance, and public pension funds," Review of Quantitative Finance and Accounting, Springer, vol. 51(4), pages 883-919, November.

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    More about this item

    Keywords

    Investor irrationality; Worthless stocks; Bankrupt firm stocks;
    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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