Abstract

http://ssrn.com/abstract=1787627
 
 

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Financial Distress, Stock Returns, and the 1978 Bankruptcy Reform Act


Dirk Hackbarth


Boston University School of Management; University of Illinois at Urbana-Champaign - College of Business

Rainer F. H. Haselmann


Bonn University

David Schoenherr


London Business School - Department of Finance

August 23, 2013


Abstract:     
We study the effect of weakening creditor rights on stock returns via a bankruptcy reform that shifts bargaining power in financial distress towards shareholders. We find that the reform reduces portfolio- and firm-level distress premia of stocks. The decline in distress premia is smaller for firms with higher and with more substitutable firm-level proxies of shareholder bargaining power, which suggests a differential effect of the reform-based increase in shareholder bargaining power on stock returns. Higher bond yield spreads for riskier over safer firms and lower distress premia for stocks with deviations from absolute priority provide supporting evidence. Out-of-sample tests reveal that a reversal of some of the reform's effects (i.e., a decrease in shareholder bargaining power) leads to a rise in distress premia to levels similar to the period before the reform. Thus, we document how creditor rights affect the costs of external funding; while weaker creditor rights are associated with higher bond yields, they can lead to lower equity premia.

Number of Pages in PDF File: 52

Keywords: financial distress, law and finance, shareholder recovery, stock returns

JEL Classification: G12, G14, G33

working papers series


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Date posted: March 21, 2011 ; Last revised: August 23, 2013

Suggested Citation

Hackbarth, Dirk and Haselmann, Rainer F. H. and Schoenherr, David, Financial Distress, Stock Returns, and the 1978 Bankruptcy Reform Act (August 23, 2013). Available at SSRN: http://ssrn.com/abstract=1787627 or http://dx.doi.org/10.2139/ssrn.1787627

Contact Information

Dirk Hackbarth (Contact Author)
Boston University School of Management ( email )
595 Commonwealth Avenue
Boston, MA 02215
United States
(617) 358-4206 (Phone)
(617) 353-6667 (Fax)
HOME PAGE: http://people.bu.edu/dhackbar/
University of Illinois at Urbana-Champaign - College of Business ( email )
4035 BIF, MC-520, Box 35
515 East Gregory Drive
Champaign, IL 61820
United States
(217) 333-7343 (Phone)
(217) 244-3102 (Fax)
HOME PAGE: http://business.illinois.edu/dhackbar/
Rainer F. H. Haselmann
Bonn University ( email )
Germany
David Schoenherr
London Business School - Department of Finance ( email )
Sussex Place
Regent's Park
London NW1 4SA
United Kingdom
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