Does the Market Know Better? The Case of Strategic vs. Non-Strategic Bankruptcies

43 Pages Posted: 21 Mar 2011

See all articles by Luís M. S. Coelho

Luís M. S. Coelho

University of Algarve - Faculty of Economics; Universidade de Évora - CEFAGE-UE

Kose John

New York University (NYU) - Department of Finance

Richard Taffler

Manchester Business School

Date Written: March 15, 2011


This paper explores the market response to two apparently similar but in fact very different firm-specific bad-news events: 1) filing a strategic Chapter 11, and 2) filing a financially-motivated Chapter 11. We find that the market is unable to distinguish between the two in both the pre-event, and bankruptcy filing event, periods. In particular, in both cases, prices drop by around a half in risk-adjusted terms in the one-year pre-event window, falling a further 25% around the event date. On the other hand, we find that the subsequent market reaction to the announcement of strategic and non-strategic Chapter 11s is quite different. For non-strategic bankruptcies, there is a post-event drift of around -29% over the subsequent 12-months. Conversely, in the case of strategic bankruptcies, we uncover a reversal in the stock return pattern: risk-adjusted abnormal returns are now of 29% in the 6-month period following the event date. As such, filing for Court protection against creditors for non-strategic reasons seems to be increasingly perceived by the market as bad news over time, while filing a strategic bankruptcy becomes recognized over time as a positive news event. Complementary analysis reveals that a mix of behavioral biases, information uncertainty and the trading environment may well help explain our puzzling results.

Keywords: Bankruptcy, behavioral biases, information uncertainty, underreaction, overreaction

JEL Classification: G14, G33

Suggested Citation

Coelho, Luis Miguel Serra and John, Kose and Taffler, Richard J., Does the Market Know Better? The Case of Strategic vs. Non-Strategic Bankruptcies (March 15, 2011). Available at SSRN: or

Luis Miguel Serra Coelho (Contact Author)

University of Algarve - Faculty of Economics ( email )

Campus de Gambelas
8000-117 Faro

Universidade de Évora - CEFAGE-UE

Largo dos Colegiais 2
Evora, 7000-803

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

Manchester Business School ( email )

Crawford House
Oxford Road
Manchester M13 9PL
United Kingdom

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