Chapter 11: Strategic advantage and social anathema?

Johnson, Brad; Baliga, B. R.; Blair, John D.

doi:10.1007/bf02116144

Cited by 6 publications

(3 citation statements)

References 4 publications

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“…Historically, bankruptcy has been associated with organizational demise and the destruction of shareholder value (e.g., Johnson et al, 1986;Sirower, 1991), with the affected firm having to face both direct and indirect bankruptcy costs (e.g., Altman, 1984;Opler and Titman, 1994;Maksimovic and Phillips, 1998;Pulvino, 1999;LoPucki and Doherty, 2004;Bris et al, 2006).…”

Section: Strategic Bankruptciesmentioning

confidence: 99%

“…This traditional position, however, has been disputed in recent years, with an increasing number of scholars claiming that the introduction of the Bankruptcy Act of 1978 fuelled a major shift in the market's perception about bankruptcy (Sheppard, 1995;Tavakolian 1995;Delaney, 1998:3). The key issue here is that the Code does not require a company to be insolvent before filing for reorganization under Chapter 11 (e.g., Johnson et al, 1986;Sheppard, 1995;Tavakolian 1995;Altman and Hotchkiss, 2005:28). As a result, US bankruptcy law offers managers a mechanism that allows their organizations, almost at will, to fight nearly every undesirable financial obligation (e.g., Sheppard, 1995;Altman, 1993:89-90).…”

Section: Strategic Bankruptciesmentioning

confidence: 99%

“…Not surprisingly, there have been many cases where firms use Chapter 11 in a nontraditional way (Johnson et al, 1986;Delaney, 1998). The term strategic bankruptcy is sometimes used in the literature to describe such situations, which are characterized by solvent companies addressing the bankruptcy Courts not as a last resort but as a planned business strategy (e.g., Sheppard, 1995;Delaney, 1998;Rose-Green and Dawkins, 2002).…”

Section: Strategic Bankruptciesmentioning

confidence: 99%

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When is Bad News Really Good News? The Case of Strategic Vs. Non-Strategic Bankruptcies

Coelho

Taffler²

2009

SSRN Journal

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We investigate whether the stock market differentiates between firms that file bankruptcy petitions for strategic reasons, and those that file for financial distress-related, i.e., non-strategic reasons. We find that the market is unable to distinguish between strategic and non-strategic Chapter 11s in both the pre-event and event periods. However, we also document an asymmetric longer-term market reaction to bankruptcy announcements conditional on type of filing with the market underreacting in the case of non-strategic bankruptcies but overreacting in the strategic case as indicated by subsequent positive abnormal returns. For non-strategic bankruptcies, we find a significant post-event drift of around-29% over the subsequent 12months. Conversely, in the case of strategic bankruptcies, we report a reversal in the stock return pattern with a significant risk-adjusted abnormal return of around +29% in the 6-month period following the Chapter 11 announcement date. We also demonstrate that our findings are robust to alternative explanations documented in prior literature like the momentum effect, industry, or financial distress. Complementary tests reveal that firm-specific information, trading costs and investor level of sophistication help explain our puzzling results; the market appears to be biased in its treatment of bankruptcy filings.

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