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

Rainer F. H. Haselmann


University of Bonn

David Schoenherr


London Business School - Department of Finance

July 3, 2014


Abstract:     
We study the effect of weakening creditor rights on distress risk premia via a bankruptcy reform that shifts bargaining power in financial distress toward shareholders. We find that the reform reduces portfolio- and firm-level risk factor loadings and returns of distressed stocks. The decline is higher for firms with lower firm-level proxies of shareholder bargaining power. Higher credit spreads for riskier over safer firms, in particular for firms with lower proxies of firm-level shareholder bargaining power, confirm a shift in bargaining power from bondholders to shareholders. 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 reversal of risk factor loadings and returns of distressed stocks to levels similar to the pre-reform period. Thus, we document how creditor rights affect the costs of external funding; while weaker creditor rights are associated with higher credit spreads, they lead to lower equity premia.

Number of Pages in PDF File: 53

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

JEL Classification: G12, G14, G33, K39

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Date posted: March 21, 2011 ; Last revised: July 4, 2014

Suggested Citation

Hackbarth, Dirk and Haselmann, Rainer F. H. and Schoenherr, David, Financial Distress, Stock Returns, and the 1978 Bankruptcy Reform Act (July 3, 2014). 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/
Rainer F. H. Haselmann
University of Bonn ( 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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