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Recovery and Returns of Distressed Bonds in Bankruptcy

Wei Wang

Queen's School of Business; University of Pennsylvania - The Wharton School

January 15, 2011

Journal of Fixed Income, Forthcoming

Linking the trading price of distressed debt after Chapter 11 filing to the ultimate recovery for a large sample of Chapter 11 cases in the past decade, this paper finds that senior bonds realize large returns while junior bonds realize losses during bankruptcy reorganization. This study then provides several explanations for the return anomaly observed in the distressed debt market. Liquidation, bankruptcy costs, and active involvement by hedge funds contribute to the understanding of the returns of distressed bonds. The large negative returns of the junior bonds during bankruptcy reorganization are most likely the result of their initial overvaluation which was due to their lottery-like features.

Number of Pages in PDF File: 28

Keywords: distressed bonds, distressed investing, recovery, Chapter 11

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Date posted: May 27, 2011 ; Last revised: June 5, 2011

Suggested Citation

Wang, Wei, Recovery and Returns of Distressed Bonds in Bankruptcy (January 15, 2011). Journal of Fixed Income, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1845512

Contact Information

Wei Wang (Contact Author)
University of Pennsylvania - The Wharton School ( email )
3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Queen's School of Business ( email )
143 Union Street
Kingston, Ontario K7L 3N6

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