Investor Ignorance in Markets for Worthless Stocks
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.
Kadapakkam, P., & Zhang, H. (2014). Investor Ignorance in Markets for Worthless Stocks. Journal of Financial Markets, 19, pp. 197-218. Elsevier.
The definitive version is available at https://doi.org/10.1016/j.finmar.2014.01.001
Business and Information Technology
Keywords and Phrases
Bankrupt firm stocks; Investor irrationality; Worthless stocks
International Standard Serial Number (ISSN)
Article - Journal
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