Faculty of Economics and Business Administration Publications Database

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

Hackbarth, Dirk
Schoenherr, David
ISSN-Print: 0893-9454
Link External Source: Online Version
Year: 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 effects leads to a reversal of factor loadings and returns.