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Keywords:

  • Chapter 11 bankruptcy;
  • Market-pricing anomaly;
  • Information diffusion rate

Abstract

This paper examines the stock price performances of 275 non-financial, non-utility U.S. industrial firms that continue trading on the main exchanges after filing for Chapter 11 bankruptcy between 1 October 1979 and 17 October 2005. This paper identifies a negative and statistically significant post-bankruptcy drift that lasts for at least 6 months. This finding adds to the literature showing that the market is unable to process bad public news events in a timely manner. Further analysis suggests that the theoretical model proposed by Hong and Stein (1999) can be used to help explain this market-pricing anomaly.