Do Market Prices Improve the accuracy of court valuations in Chapter 11?

Demiroglu, C, Franks, J and Lewis, R (2022) Do Market Prices Improve the accuracy of court valuations in Chapter 11? Journal of Finance, 77 (2). pp. 1179-1218. ISSN 0022-1082

Abstract

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.