Do Market Prices Improve the Accuracy of Court Valuations in Chapter 11?

Do Market Prices Improve the Accuracy of Court Valuations in Chapter 11?

Cem Demiroglu, Julian Franks, Ryan Lewis

Series number :

Serial Number: 
655/2020

Date posted :

February 14 2020

Last revised :

October 19 2021
SSRN Share

Keywords

  • Bankruptcy • 
  • Chapter 11 • 
  • TRACE • 
  • Transparency • 
  • Bond • 
  • Dissemination

The average difference between the court value and post-emergence market value of newly issued stocks in Chapter 11 reorganizations exceeds 50%. We show that public dissemination of transactions in defaulted bonds reduces this difference by 23% and largely eliminates inter-claimant wealth transfers.

The effects of dissemination are only significant when the bonds are sufficiently traded around the court valuation date, and when they receive significant amounts of post-emergence equity, indicating that the bond’s value is sensitive to the size and allocation of the pie. These findings imply that security prices have real effects: They improve the valuations of bankruptcy participants.

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Published in

Published in: 
Publication Title: 
Forthcoming Journal of Finance

Authors

Real name:
Cem Demiroglu
Real name:
Ryan Lewis