Do Market Prices Improve the Accuracy of Court Valuations in Chapter 11?
Forthcoming Journal of Finance
62 Pages Posted: 24 Nov 2015 Last revised: 18 Oct 2021
Date Written: October 18, 2021
The average difference between the court value and post-emergence market value of newly issued stocks in Chapter 11 reorganizations exceeds 50%. We show that public dissemination of transactions in defaulted bonds reduces this difference by 23% and largely eliminates inter-claimant wealth transfers. The effects of dissemination are only significant when the bonds are sufficiently traded around the court valuation date, and when they receive significant amounts of post-emergence equity, indicating that the bond’s value is sensitive to the size and allocation of the pie. These findings imply that security prices have real effects: They improve the valuations of bankruptcy participants.
Keywords: Bankruptcy, Chapter 11, TRACE, Transparency, Bond, Dissemination
JEL Classification: G14, G18, G33, G34, K22
Suggested Citation: Suggested Citation