Abstract

When is Bankruptcy Threat Bad News? Risk and Return Analysis of Firms Announcing Bankruptcy in the US and Germany

Vladimirov, Vladimir

The bankruptcy announcement is a critical moment in the history of a firm. The value destruction connected with it is however greater for some firms than for others. In this empirical analysis of 1160 US and 116 German firms, having filed for bankruptcy between 1999 and 2007, an economic explanation is given for this phenomenon. Taking the perspective of the equity holders, different market and balance sheet based data are used to explain the wild stock reaction around the bankruptcy announcement. Using a matched sample of US and German firms, the paper further makes a comparison between the two bankruptcy codes. It shows that equity holders do not necessarily fare better under a debtor friendly procedure. Not only do they suffer more often from bankruptcy announcements, but they also lose more and accumulate these losses faster than their German counterparts. The results further suggest larger value destruction in the USA due to agency and bankruptcy costs, thereby giving support to current findings in the literature that debtor friendly codes trigger mechanisms making shareholders eventually worse off. JEL Classification: G33, G38
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