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Gambling On The Stock Market: The Case Of Bankrupt Companies

This paper asks whether the stocks of bankrupt firms are correctly priced, and explores who trades the stocks of these firms, and why. This sample consists of firms that enter into Chapter 11 and remain listed on the NYSE, AMEX, and NASDAQ post-filing. The authors show that these stocks are heavily traded by retail investors who are also their main stockholders. They further document that these stocks have unique lottery-like characteristics, and that retail investors trade in such stocks as if they were gambling on the market. Buying and holding such securities leads, on average, to a negative realized abnormal return of at least -28% over the 12-month post-announcement period.

Provided by: New York University Topic: Banking Date Added: Jan 2011 Format: PDF

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