Bankruptcy as a planned business strategy? Evidence from the stock market

Abstract

Purpose This paper aims to investigate how the US stock market deals with the announcement of a strategic Chapter 11, a special type of corporate bankruptcy in which companies seek the protection of the law not as a last resort but as a planned business decision. Design/methodology/approach An event study is conducted by using data concerning a group of US publicly traded companies that entered Chapter 11 for both strategic and nonstrategic reasons. Regression analysis is also used for robustness purposes. Findings This study reveals that initiating both strategic and nonstrategic Chapter 11 proceedings results in negative and statistically significant abnormal stock returns before and at the bankruptcy announcement date. However, in the period following the filing, the market gradually views strategic bankruptcy cases as positive news, whereas nonstrategic Chapter 11 filings continue to be perceived as distinctly negative. Originality/value To the best of the author’s knowledge, this is the first paper that documents an asymmetric market reaction to the announcement of Chapter 11, suggesting that, in certain circumstances, managers can add value by filing a strategic bankruptcy.