Three essays on bankrupt firms

This dissertation analyzes the valuation of bankrupt firms in three essays: (I) The long-run performance of firms emerging from Chapter 11 bankruptcy; (2) An empirical analysis of the performance of equity offerings by prior bankrupt firms; and (3) Do acquisitions ofbankrupt assets benefit the shareholders of the acquiring firms? The first essay examines the long-run performance of firms emerging from Chapter 11 bankruptcy. Once a firm files for Chapter 11 bankruptcy, it has to file a disclosure statement with the bankruptcy court. The statement details the company's current state of affairs and the factors that led to bankruptcy. The company also files a plan of reorganization. The plan details the company's debts and how the company plans to restructure and pay the debts. While operating under Chapter 11, the company makes regular disclosures of operating data to the court. Upon emergence from bankruptcy, the company adopts fresh start reporting whereby its assets are reported at their net realizable values. Hence, the bankruptcy process provides the market with information that is useful in assessing the potential of the finn that is emerging from bankruptcy. As a result, post-bankruptcy, the performance of the firm should match expectation. Indeed, the evidence suggests that there is pricing efficiency after firms emerge from Chapter II bankruptcy and that they seem to perform properly when size, structure and risk are taken into account. The second essay examines the pricing of equity offerings by firms that emerged from Chapter II bankruptcy. In contrast to original IPOs, which are completely new to the market, post-bankruptcy equity offerings are performed by firms that were once publicly traded. Furthermore, while they are operating under Chapter II, the bankruptcy process provides information relevant in assessing the value of the firms upon their emergence from bankruptcy. Hence, there exists less information asymmetry in equity offerings by firms that emerged from bankruptcy compared to original IPOs. The reduced information asymmetry implies that the level of mispricing, if any, should be less in post-bankruptcy equity offerings than in original IPOs. Indeed, the results suggest that post-bankruptcy equity offerings are less underpriced than original IPOs and they are not subject to a reversal in returns in the long-run. The third essay examines the wealth effects of acquisitions of bankrupt assets to the acquiror's shareholders. Bankruptcy can lead to underpriced assets, lower costs of acquiring them and concessions from creditors of the bankrupt firm. These factors increase the net worth of acquiring bankrupt assets. Indeed, the results suggest that firms announcing acquisitions of bankrupt assets experience favorable wealth effects.