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Investing in Bankrupt Firms

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  • Morse, Dale
  • Shaw, Wayne

Abstract

The authors examine the investment characteristics of firms electin g to enter bankruptcy between 1973 and 1982. Comparisons are made before and after the Bankruptcy Reform Act of 1978. The results indicate that the 1978 Act had no significant impact on bankruptcy decisions or resolutions for actively traded firms. Trading in bankru pt firms' securities is becoming more common, but no abnormal returns appear to be available. Systematic risk does not change significantl y with the filing of bankruptcy, but there is a significant increase in return variance. The financial markets also react to various announcements of stages in the reorganization process. Copyright 1988 by American Finance Association.

Suggested Citation

  • Morse, Dale & Shaw, Wayne, 1988. " Investing in Bankrupt Firms," Journal of Finance, American Finance Association, vol. 43(5), pages 1193-1206, December.
  • Handle: RePEc:bla:jfinan:v:43:y:1988:i:5:p:1193-1206
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    Cited by:

    1. Iraj Hashi, 1995. "The Economics of Bankrupcy, Reorganisation and Liquidation: Lessons for East European Transitional Economies," CASE Network Studies and Analyses 0041, CASE-Center for Social and Economic Research.
    2. Lara Abdel Fattah & Sylvain Barthélémy & Nadine Levratto & Benjamin Trempont, 2016. "Post-reorganization survival: a semi-parametric and non-parametric analysis of firm characteristics," EconomiX Working Papers 2016-22, University of Paris Nanterre, EconomiX.
    3. Christensen, Peter Ove & Flor, Christian Riis & Lando, David & Miltersen, Kristian R., 2014. "Dynamic capital structure with callable debt and debt renegotiations," Journal of Corporate Finance, Elsevier, vol. 29(C), pages 644-661.
    4. 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.
    5. Chi, Li-Chiu & Tang, Tseng-Chung, 2007. "Impact of reorganization announcements on distressed-stock returns," Economic Modelling, Elsevier, vol. 24(5), pages 749-767, September.
    6. Jun Xia & David D. Dawley & Han Jiang & Rong Ma & Kimberly B. Boal, 2016. "Resolving a dilemma of signaling bankrupt-firm emergence: A dynamic integrative view," Strategic Management Journal, Wiley Blackwell, vol. 37(8), pages 1754-1764, August.
    7. Stavros Peristiani, 2003. "Evaluating the riskiness of initial public offerings: 1980-2000," Staff Reports 167, Federal Reserve Bank of New York.
    8. Galai, Dan & Raviv, Alon & Wiener, Zvi, 2007. "Liquidation triggers and the valuation of equity and debt," Journal of Banking & Finance, Elsevier, vol. 31(12), pages 3604-3620, December.
    9. Indro, Daniel C. & Leach, Robert T. & Lee, Wayne Y., 1999. "Sources of gains to shareholders from bankruptcy resolution," Journal of Banking & Finance, Elsevier, vol. 23(1), pages 21-47, January.

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