IDEAS home Printed from
   My bibliography  Save this paper

Gambling on the stock market: the case of bankrupt companies


  • Luís Miguel Serra Coelho

    (University of the Algarve and CEFAGE)

  • Kose John

    (New York University)

  • Richard J. Taffler

    (Warwick Business School)


This paper asks whether the stocks of bankrupt firms are correctly priced, and explores who trades the stocks of these firms, and why. Our sample consists of firms that enter into Chapter 11 and remain listed on the NYSE, AMEX, and NASDAQ post-filing. We show that these stocks are heavily traded by retail investors who are also their main stockholders. We further document that these stocks have unique lottery-like characteristics, and that retail investors trade in such stocks as if they were gambling on the market. Buying and holding such securities leads, on average, to a negative realized abnormal return of at least -28% over the 12-month post-announcement period. We find that arbitrageurs are not able to exploit this market-pricing anomaly due to implementation costs, and risks that are simply too high. We thus conclude that a combination of gambling-motivated trading by retail investors and limits to arbitrage seems to lead to the anomalous results we document. Our paper thus provides a clear answer to Eugene Fama and Kenneth French’s recent question on their blog – “Bankrupt Firms: Who’s Buying?”.

Suggested Citation

  • Luís Miguel Serra Coelho & Kose John & Richard J. Taffler, 2011. "Gambling on the stock market: the case of bankrupt companies," CEFAGE-UE Working Papers 2011_03, University of Evora, CEFAGE-UE (Portugal).
  • Handle: RePEc:cfe:wpcefa:2011_03

    Download full text from publisher

    File URL:
    Download Restriction: no


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. Kadapakkam, Palani-Rajan & Zhang, Hongxian, 2014. "Investor ignorance in markets for worthless stocks," Journal of Financial Markets, Elsevier, vol. 19(C), pages 197-218.

    More about this item


    Chapter 11 filing; Post-bankruptcy trading; Gambling; Lottery stocks; Limits to arbitrage; Retail investors.;
    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

    NEP fields

    This paper has been announced in the following NEP Reports:


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cfe:wpcefa:2011_03. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Angela Pacheco (email available below). General contact details of provider: .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.