← Search

Financial Distress, Stock Returns, and the 1978 Bankruptcy Reform Act

Dirk Hackbarth1; Rainer Haselmann2; David Schoenherr3

1 Boston University · 2 Goethe University Frankfurt · 3 London Business School

Review of Financial Studies 2015

We study distress risk premia around a bankruptcy reform that shifts bargaining power in financial distress from debtholders to shareholders. We find that the reform reduces risk factor loadings and returns of distressed stocks. The reform effect is stronger for firms with lower firm-level shareholder bargaining power. An increase in credit spreads of riskier relative to safer firms, in particular for firms with lower firm-level shareholder bargaining power, confirms a shift in bargaining power from bondholders to shareholders. Out-of-sample tests reveal that a reversal of the reform's effect leads to a reversal of factor loadings and returns.

DOI
10.1093/rfs/hhv009
Volume
28 (6)
Pages
1810-1847
Language
en
Export
BibTeX
Sources
crossref openalex