Investing in Bankrupt Stocks: Is It a Sweet Trick?

Volume: 2 Number: 4 December 1, 2013
  • Ben Branch
  • Min Xu
Journal of Business Economics and Finance Cover
Journal of Business Economics and Finance
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Investing in Bankrupt Stocks: Is It a Sweet Trick?

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.

Keywords

References

  1. Aharony, J., Jones, C. P., and Swary, I. (1980), An Analysis of Risk and Return Characteristics of Corporate Bankruptcy Using Capital Market Data, Journal of Finance, Vol.35, p.1001-1016.
  2. Alderson, M.J. and Betker, B. (1999),Assessing Post-Bankruptcy Performance: An Analysis of Reorganized Firm’s Cash Flows,Financial Management, Vol.28, No.2, p.68-82.
  3. Altman, E. (1968), Financial Ratios, Discriminant Analysis and the Prediction of Corporate Bankruptcy,Journal of Finance, Vol.23, p.589-609.
  4. Altman, E. I. (1969), Bankrupt Firms' Equity Securities as an Investment Alternative, Financial Analysts Journal, Vol.25, p.129-133.
  5. Blume, M. E., Keim, D. B. and Patel, S. A. (1991), Returns and Volatility of Low-Grade Bonds 1977-1989, Journal of Finance, Vol.46, p.49-74.
  6. Branch, B., and Russel, P. (2001), Penny Stocks of Bankrupt Firms: Are They Really a Bargain?Business Quest.
  7. Bris, A., Welch, I., and Zhu, N. (2006), The Costs of Bankruptcy: Chapter 7 Liquidation vs. Chapter 11 Reorganization, Journal of Finance, Vol.61, p.1253-1305.
  8. Brown, S. and Warner, J. (1980), Measuring Security Price Performance, Journal of Financial Economics, Vol.8, p.205-258.

Details

Primary Language

English

Subjects

-

Journal Section

-

Authors

Ben Branch This is me

Publication Date

December 1, 2013

Submission Date

November 4, 2014

Acceptance Date

-

Published in Issue

Year 2013 Volume: 2 Number: 4

IZ

https://izlik.org/JA48YY87JU

Cite

RIS / Bibtex
APA
Branch, B., & Xu, M. (2013). Investing in Bankrupt Stocks: Is It a Sweet Trick? Journal of Business Economics and Finance, 2(4), 33-49. https://izlik.org/JA48YY87JU
AMA
1.Branch B, Xu M. Investing in Bankrupt Stocks: Is It a Sweet Trick? JBEF. 2013;2(4):33-49. https://izlik.org/JA48YY87JU
Chicago
Branch, Ben, and Min Xu. 2013. “Investing in Bankrupt Stocks: Is It a Sweet Trick?”. Journal of Business Economics and Finance 2 (4): 33-49. https://izlik.org/JA48YY87JU.
EndNote
Branch B, Xu M (December 1, 2013) Investing in Bankrupt Stocks: Is It a Sweet Trick? Journal of Business Economics and Finance 2 4 33–49.
IEEE
[1]B. Branch and M. Xu, “Investing in Bankrupt Stocks: Is It a Sweet Trick?”, JBEF, vol. 2, no. 4, pp. 33–49, Dec. 2013, [Online]. Available: https://izlik.org/JA48YY87JU
ISNAD
Branch, Ben - Xu, Min. “Investing in Bankrupt Stocks: Is It a Sweet Trick?”. Journal of Business Economics and Finance 2/4 (December 1, 2013): 33-49. https://izlik.org/JA48YY87JU.
JAMA
1.Branch B, Xu M. Investing in Bankrupt Stocks: Is It a Sweet Trick? JBEF. 2013;2:33–49.
MLA
Branch, Ben, and Min Xu. “Investing in Bankrupt Stocks: Is It a Sweet Trick?”. Journal of Business Economics and Finance, vol. 2, no. 4, Dec. 2013, pp. 33-49, https://izlik.org/JA48YY87JU.
Vancouver
1.Ben Branch, Min Xu. Investing in Bankrupt Stocks: Is It a Sweet Trick? JBEF [Internet]. 2013 Dec. 1;2(4):33-49. Available from: https://izlik.org/JA48YY87JU

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