THE INTRA-INDUSTRY EFFECTS OF CHAPTER 11 FILINGS: EVIDENCE FROM ANALYSTS’ EARNINGS FORECAST REVISIONS

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Gary L. Caton, Jeffrey Donaldson, Jeremy Goh

DOI:10.22495/cocv9i4c2art7

Abstract

Shareholders suffer huge losses when firms they own file Chapter 11. Interestingly, even shareholders of rival companies experience statistically significant losses. We examine how the bad news associated with a bankruptcy filing is transferred to the filing firm’s rivals. Using revisions in analysts’ earnings forecasts as a proxy for changes in expected future cash flows, we find that after a bankruptcy filing the market revises downward its cash flow expectations for rivals. Regression analysis confirms a positive relation between changes in expected cash flow and stock market reactions. These findings are consistent with our hypothesis that bad news associated with bankruptcy filings are transferred to rivals through reductions in expected future cash flows.

Keywords: Chapter 11, Sharegolders, Bankruptcy Filings, Rivals

How to cite this paper: Caton, G. L., Donaldson, J., Goh, J. (2012). The intra-industry effects of chapter 11 filings: Evidence from analysts’ earnings forecast revisions. Corporate Ownership & Control, 9(4-2), 262-268. http://dx.doi.org/10.22495/cocv9i4c2art7