Bankrupt Firms: Who's Buying?

60 Pages Posted: 19 Mar 2010

See all articles by Luis Coelho

Luis Coelho

University of Algarve

Kose John

New York University (NYU) - Department of Finance

Richard Taffler

Manchester Business School

Date Written: March 14, 2010


This paper asks whether the stocks of bankrupt firms are correctly priced, and explores who trades the stocks of these firms, and why. We show that firms in Chapter 11 are heavily traded by retail investors who are also their main shareholders. We further demonstrate that the stocks of these firms have unique lottery-like characteristics, and that retail investors apparently trade in such stocks as if they were gambling on the market. Considering the price impact of this investor behavior we document that 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, a result inconsistent with traditional asset pricing models. However, examining how arbitrageurs might exploit this apparent market pricing anomaly, we find they have little incentive to intervene in this particular market: implementation costs and risks 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 apparent market pricing paradox 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

Coelho, Luis and John, Kose and Taffler, Richard J., Bankrupt Firms: Who's Buying? (March 14, 2010). Available at SSRN: or

Luis Coelho

University of Algarve ( email )

8000-117 Faro

Kose John

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0337 (Phone)
212-995-4233 (Fax)

Richard J. Taffler (Contact Author)

Manchester Business School ( email )

Crawford House
Oxford Road
Manchester M13 9PL
United Kingdom

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