New Equity Performance Following Chapter 11 Emergence
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Journal of Business & Economics Research – August 2007 Volume 5, Number 8
91
New Equity Performance
Following Chapter 11 Emergence
Nicholas K.
Wold, Colorado College
Judith A.
Laux, (E-mail: jlaux@coloradocollege.
edu), Colorado...
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Journal of Business & Economics Research – August 2007 Volume 5, Number 8
91
New Equity Performance
Following Chapter 11 Emergence
Nicholas K.
Wold, Colorado College
Judith A.
Laux, (E-mail: jlaux@coloradocollege.
edu), Colorado College
ABSTRACT
This body of research investigates how the performance of exchange-traded common equity from
firms in Chapter 11 bankruptcy emergence compares with common stock from non-bankrupt
competitors and recently public peers in short and long-term time horizons.
Return data are
gathered for a sample of sixteen financially restructured companies, each paired with two nondistressed industry competitors and one recently-public peer.
Using the Capital Asset Pricing
Model as a primary analytical tool, empirical tests show a positive correlation in equity returns
among the samples of restructured and non-distressed market competitors and a stock
underperformance from the sample of IPO competitors.
These results suggest that markets are
better at judging the value of post-Chapter 11 companies relative to newly public companies and
refute the theory of IPO price momentum.
INTRODUCTION
he growth and overall health of an economic system rely on the success of its businesses and their
ability to effectively compete with rival firms.
One of the most fundamental aspects of a firm’s
success is its financial state.
Specifically, the fiscal stability of a company and its ability to stay
profitable are important to sustaining a competitive advantage within an industry and constitute ongoing concerns for
management and private and public investors.
In recent years, the American automakers’ struggle in maintaining
market share and the poor operating performance of domestic airlines have created considerable focus on the topic of
corporate bankruptcy and the outlook of firms in financial distress.
In 2005 alone, over 39,200 American-based firms
filed for some type of bankruptcy protection.
This volume of corporate bankruptcy filings is a non-trivial issue
concerning the American economy and a topic which deserves a closer look.
The purpose of this study is to look at the performance of exchange-traded common equity from firms in
Chapter 11 bankruptcy emergence compared to the common stock of non-bankrupt market competitors and recently
public peers in a short-term and long-term outlook, using the capital asset pricing model as the primary tool for
valuation and analysis.
The hypothesis is that the return of common stock issued by firms in Chapter 11 bankruptcy
emergence will outperform its market competitors and closely match the performance of its newly public competitors.
The first half of this paper reviews previous empirical research relating to both Chapter 11 bankruptcy and
stock performance and summarizes theoretical sources relating to the efficient market hypothesis, behavioral investing
trends in capital markets and price momentum in newly-traded equity.
The underlying purpose of this section is to
provide the reader an adequate background on the historical performance of financially distressed firms and related
concepts, creating a foundation of knowledge to help support or refute the current research and results.
The second
half of this study examines the results of this research, specifically looking at the implications for the performance of
financially restructured companies in comparison to their non-distressed peers in both a short-term and long-term time
span.
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