Both authors from Johnson Graduate School of Management, Cornell University. We are grateful to Theodore Eisenberg, an anonymous referee, and participants in research seminars at Cornell and at University of North Carolina. Financial support came from the Accounting Institute at Cornell University.
Investing in Bankrupt Firms
Article first published online: 30 APR 2012
1988 The American Finance Association
The Journal of Finance
Volume 43, Issue 5, pages 1193–1206, December 1988
How to Cite
MORSE, D. and SHAW, W. (1988), Investing in Bankrupt Firms. The Journal of Finance, 43: 1193–1206. doi: 10.1111/j.1540-6261.1988.tb03964.x
- Issue published online: 30 APR 2012
- Article first published online: 30 APR 2012
We examine the investment characteristics of firms electing to enter bankruptcy, between 1973 and 1982. Comparisons are made before and after the Bankruptcy Reform Act of 1978. Our results indicate that the 1978 Act had no significant impact on bankruptcy decisions or resolutions for actively traded firms. Trading in bankrupt firms' securities is becoming more common, but no abnormal returns appear to be available. Systematic risk does not change significantly with the filing of bankruptcy, but there is a significant increase in return variance. The financial markets also react to various announcements of stages in the reorganization process.