Systematic Share Price Fluctuations after Bankruptcy Filings and the Investors who Drive Them

47 Pages Posted: 8 Feb 2006  

Mark Dawkins

University of Georgia - C. Herman and Mary Virginia Terry College of Business

Neil Bhattacharya

Singapore Management University - School of Accountancy

Linda Smith Bamber

University of Georgia - J.M. Tull School of Accounting

Date Written: December 2005

Abstract

This study presents empirical evidence on the pattern of returns and investor trades around and shortly after Chapter 11 bankruptcy petition filings. Consistent with prior research, we find that share prices plunge before and at the bankruptcy filing date. Beginning in the 1990's, however, firms often continued to trade on the major national exchanges after filing for bankruptcy. Thus, our primary contribution is new evidence on the patterns of returns and trades after bankruptcy filings.

We document a systematic pattern of returns after bankruptcy filings - the filing period price plunge is followed by a price runup in the immediate post-filing period which turns out to be short-lived. Thus, we find two post-filing reversals: (1) the price plunge in the -1 to +1 filing period is inversely associated with abnormal returns in the day +2 to +5 post-filing period, and (2) returns cumulated over days +2 to +5 are negatively associated with subsequent returns cumulated from days +6 to +10. These reversals are not attributable to bid-ask bounce, and they hold after controlling for various factors associated with post-filing returns (firm size, financial condition, use of debtor-in-possession financing, use of prepackaged filings). Detailed analysis of investor trades suggests these reversals are attributable to the activities of large traders, not to small, arguably less sophisticated traders.

Keywords: Bankruptcy filing, price reaction, market efficiency, bid-ask bounce

JEL Classification: G33, G14

Suggested Citation

Dawkins, Mark and Bhattacharya, Neil and Bamber, Linda Smith, Systematic Share Price Fluctuations after Bankruptcy Filings and the Investors who Drive Them (December 2005). Available at SSRN: https://ssrn.com/abstract=881508 or http://dx.doi.org/10.2139/ssrn.881508

Mark Dawkins

University of Georgia - C. Herman and Mary Virginia Terry College of Business ( email )

Brooks Hall
Athens, GA 30602-6254
United States
706-542-3632 (Phone)

Neil Bhattacharya (Contact Author)

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore 178900
Singapore

Linda Smith Bamber

University of Georgia - J.M. Tull School of Accounting ( email )

Athens, GA 30602
United States
706-542-3501 (Phone)
706-542-3630 (Fax)

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