Investor Ignorance in Markets for Worthless Stocks

Abstract

We examine stocks of bankrupt firms after the court confirms they will receive nothing. While trading volume is negligible for most worthless stocks, some have sizable trading volume, indicating investor ignorance of their zero intrinsic value. Prices respond irrationally to news in several instances, and they are higher for more liquid worthless stocks, which are more likely to attract uninformed investors. Our analysis includes the first empirical examination of short-selling in bankrupt firms. Short-covering cannot account for the anomalous price and trading volume. Short-sellers are active in these stocks and play a useful role in pushing prices down toward intrinsic value.

Department(s)

Business and Information Technology

Keywords and Phrases

Bankrupt firm stocks; Investor irrationality; Worthless stocks

International Standard Serial Number (ISSN)

1386-4181

Document Type

Article - Journal

Document Version

Citation

File Type

text

Language(s)

English

Rights

© 2014 Elsevier B.V., All rights reserved.

Publication Date

Jun 2014

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