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

48 Pages Posted: 21 Mar 2011 Last revised: 3 Nov 2014

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

Date Written: 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

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

JEL Classification: G12, G14, G33

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

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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