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

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.