Abstract
The relationship between the stock-market implication of a bankrupt firm’s prospect and the unsecured creditors’ recovery rate is often overlooked as they are seemingly unrelated to each other. However, if the APR is strictly applied, the existing shareholders of a bankrupt firm will not be compensated until all the claims by both the creditors are satisfied. Therefore, it is reasonable to believe that the stock market carries additional information with regards to the fate of the unsecured claims. Moreover, the Chapter 11 process provides a firm with the opportunity not only to reorganize its debt but also to improve its profitability through continuous business activities. This study examines whether the estimated probability for a firm to emerge from bankruptcy has significant predictive power over the unsecured recovery rate. It is distinct from previous studies because it incorporates the underlying business risk indicated by the stock market around the bankruptcy filing dates.
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