Bankruptcy Sells Stocks… But Who's Buying (and Why)?
62 Pages Posted: 24 Apr 2014
Date Written: April 22, 2014
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: Suggested Citation