The Information Content of Bankruptcy Filing on Securityholders of the Bankrupt Firm: An Empirical Investigation

Abstract

This paper captures the information content of bankruptcy filing announcements on stockholders and three different classes of debtholders using daily excess returns. Significant negative stock price reaction to the filing announcement is documented. More interestingly, the secured debtholders are unaffected by the announcement. However, the unsecured and the convertible debt classes exhibit significant adverse price reactions. During the event period, the secured debtholders gain significantly while all other classes experience substantial losses. Cross- sectional analysis reveals that the complexity of the reorganization process, the security of the debt issue, and to some degree the anticipation of the bankruptcy filing are important determinants of bond excess returns. It is also found that leverage plays a significant role in preserving firm value by forcing the firm to confront reorganization sooner.

JEL Classification: G33, G34