The Equity Performance of U.S. Firms Emerging from Chapter 11 Bankruptcy

Abstract

The aim of this study is to explore and assess the long-run stock return performance of the firms emerging from bankruptcy under Chapter 11 of the U.S. Bankruptcy Code using event study methodology in U.S. market. The abnormal return tests are executed for the full sample period 1994-2011 as well as two sub-sample periods of 1994-2006 and 2007-2011. Findings for the full sample period as well as first sub-sample period support substantial evidence of positive abnormal returns in short term as well as in long term. Several factors such as changing industrial code, state of incorporation and state of filing etc. are found to have significant effect on positive abnormal returns in the first sub-sample period. However, the results from the second sub-sample period exhibit mixed evidence of both positive and negative abnormal returns. Surprisingly, abnormal returns around the earnings announcements are also found significantly negative. The results from the second sub-sample period and around earnings announcements contradict the findings in previous studies which have documented highly positive abnormal returns for the companies emerging from bankruptcy.