Abstract
By linking the trading price of distressed debt after Chapter 11 filing to the ultimate recovery for a large sample of Chapter 11 cases in the past decade, this article finds that senior bonds realize large returns while junior bonds realize losses during bankruptcy reorganization. In addition, this study provides several explanations for the return anomaly observed in the distressed debt market. Liquidation, bankruptcy costs, and active involvement by hedge funds contribute to the understanding of the returns of the distressed bonds. The large negative returns of the junior bonds during bankruptcy reorganization are most likely the result of their initial overvaluation, which was due to their lottery-like features. <b>TOPICS:</b>Fixed-income portfolio management, statistical methods, exchanges/markets/clearinghouses
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