Business-Bankruptcy After the BAPCPA: Evidence From the Stock Market

What is it about?

Little is known about how the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) affects the business-bankruptcy landscape in the United States. This study addresses this gap in the literature by investigating the stock price dynamics of firms filing for Chapter 11 under both the 1978 Bankruptcy Act and the BAPCPA. Results show that, on average, shareholders of firms filing for Chapter 11 under the new Act lose significantly more both at and shortly after the event date than their 1978 counterparts do. Given the economic magnitude and robustness of these findings, this article’s empirical evidence suggests the market perceives the BAPCPA to be more creditor-friendly than its predecessor is.

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Why is it important?

This study helps to shed light on the business-related effects of the BAPCPA, a clearly underresearched topic in the literature. In particular, it investigates how the U.S. equity market prices the effects of the passing of the BAPCPA as expressed by the stock price abnormal performance of firms entering bankruptcy proceedings. There is evidence that new Code is more taxing on shareholders, which suggests the market perceives the BAPCPA as being more creditor-friendly than its predecessor.