Abstract

https://ssrn.com/abstract=1787627
 
 

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


Dirk Hackbarth


Boston University Questrom School of Business

Rainer F. H. Haselmann


Goethe University Frankfurt - Research Center SAFE; Goethe University Frankfurt - Faculty of Economics and Business Administration

David Schoenherr


Princeton University, Bendheim Center for Finance

September 26, 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 risk factor loadings and returns of distressed stocks. The effect is stronger for firms with lower firm-level shareholder bargaining power. An increase in credit spreads of riskier relative to safer firms, in particular for firms with lower firm-level shareholder bargaining power, confirms a shift in bargaining power from bondholders to shareholders. Out-of-sample tests reveal that a reversal of the reform's effects leads to a reversal of factor loadings and returns.

The appendices for this paper are available at the following URL: http://ssrn.com/abstract=2517596

Number of Pages in PDF File: 48

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

JEL Classification: G12, G14, G33


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Date posted: March 21, 2011 ; Last revised: November 3, 2014

Suggested Citation

Hackbarth, Dirk and Haselmann, Rainer F. H. and Schoenherr, David, Financial Distress, Stock Returns, and the 1978 Bankruptcy Reform Act (September 26, 2014). Available at SSRN: https://ssrn.com/abstract=1787627 or http://dx.doi.org/10.2139/ssrn.1787627

Contact Information

Dirk Hackbarth (Contact Author)
Boston University Questrom School of Business ( email )
Department of Finance
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
Goethe University Frankfurt - Research Center SAFE ( email )
(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

Goethe University Frankfurt - Faculty of Economics and Business Administration ( email )
Mertonstrasse 17-25
Frankfurt am Main, D-60325
Germany
David Schoenherr
Princeton University, Bendheim Center for Finance ( email )
26 Prospect Avenue
Princeton, NJ 08540
United States
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