Bankruptcy Sells Stocks… But Who's Buying (and Why)?

62 Pages Posted: 24 Apr 2014

See all articles by Luis Coelho

Luis Coelho

University of Algarve

Kose John

New York University (NYU) - Department of Finance

Alok Kumar

University of Miami - Miami Herbert Business School

Richard Taffler

University of Warwick - Finance Group

Date Written: April 22, 2014

Abstract

Firms that file for Chapter 11 are actively traded. This paper investigates who trades these bankrupt firms and why. We also examine the potential pricing impact of this active trading. We find that the unique lottery-like characteristics of bankrupt firms make them attractive to a particular retail investor clientele who uses them to gamble in the market. Such gambling-motivated trading generates an average annual abnormal return of −28% following the bankruptcy filing date, but arbitrageurs do not fully exploit this mispricing. Overall, the combination of gambling-motivated retail trading and limits to arbitrage generate the anomalous market underreaction we document.

Keywords: Post-Chapter 11 trading, gambling, lottery-like stocks, retail investors, limits to arbitrage, market under-reaction

JEL Classification: G14, G33

Suggested Citation

Coelho, Luis and John, Kose and Kumar, Alok and Taffler, Richard, Bankruptcy Sells Stocks… But Who's Buying (and Why)? (April 22, 2014). Available at SSRN: https://ssrn.com/abstract=2427770 or http://dx.doi.org/10.2139/ssrn.2427770

Luis Coelho

University of Algarve ( email )

8000-117 Faro
Portugal

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)

Alok Kumar (Contact Author)

University of Miami - Miami Herbert Business School ( email )

514 Jenkins Building
Department of Finance
Coral Gables, FL 33124-6552
United States
305-284-1882 (Phone)

HOME PAGE: http://moya.bus.miami.edu/~akumar

Richard Taffler

University of Warwick - Finance Group ( email )

Gibbet Hill Rd
Coventry, CV4 7AL
Great Britain
+442476524153 (Phone)
+442476523779 (Fax)

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