The Disappeared Outperformance of Post-reorg Equity

The Journal of Alternative Investments, Winter 2023, 25 (3) 118 - 137 DOI: 10.3905/jai.2022.1.180

Posted: 18 Aug 2021 Last revised: 11 Apr 2024

See all articles by Wei Jiang

Wei Jiang

Emory University Goizueta Business School; ECGI; NBER

Wei Wang

Queen's University - Smith School of Business

Yan Yang

Queen's University - Smith School of Business

Date Written: June 22, 2021

Abstract

Using trading information of a comprehensive sample of relisted Chapter 11 firms in the past few decades, we find that the one-year market-adjusted buy-and-hold returns of post-reorg equity are over 50%. An equal-weighted calendar-time portfolio generates 7.2% annualized excess returns over a five-factor benchmark from 1992 to 2019. However, the outperformance concentrates in the 2000s, when institutional ownership of post-reorganization equity increased significantly. The positive post-emergence earnings announcement returns disappear in the most recent decade, and stocks of firms have better initial valuation after emergence. The evidence suggests that the outperformance of post-reorg equity documented in earlier studies is most likely due to market expectation errors for future earnings and thus initial undervaluation, which has been corrected in the recent period by sophisticated institutional investors.

Keywords: bankruptcy, stock returns, over-the-counter (OTC) market, earnings announcement, institutional ownership

JEL Classification: G11, G14, G3

Suggested Citation

Jiang, Wei and Wang, Wei and Yang, Yan, The Disappeared Outperformance of Post-reorg Equity (June 22, 2021). The Journal of Alternative Investments, Winter 2023, 25 (3) 118 - 137 DOI: 10.3905/jai.2022.1.180, Available at SSRN: https://ssrn.com/abstract=3906039 or http://dx.doi.org/10.2139/ssrn.3906039

Wei Jiang

Emory University Goizueta Business School ( email )

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Belgium

NBER ( email )

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Wei Wang (Contact Author)

Queen's University - Smith School of Business ( email )

Queen's University-Smith School of Business
143 Union Street
Kingston, Ontario K7L 3N6
Canada

Yan Yang

Queen's University - Smith School of Business ( email )

Smith School of Business - Queen's University
143 Union Street
Kingston, Ontario K7L 3N6
Canada

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