Abstract:

We track the holding period return from investing in bankrupt stocks using a buy-and-hold strategy, buying the stocks on the bankruptcy filing date and holding them until the final resolution date (reorganization or liquidation). We find that holding a simple long position in the bankrupt stocks will generally lead to a large loss. The holding period return computed from the stock price alone cannot show the entire story. When considering final distributions plus the stock price, we seea much greater loss. In our regression analysis, we find that liquidity is always a key factor in explaining the returns. Profitability and information uncertainty plays a significant role in explaining the positive returns, while liquidity and (un)profitability are the two key issues associated with the negative returns. In addition, the involvement of hedge funds does not seem to be associated with better stock performance.

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