Does the market know better ?

This paper explores the market response to two apparently similar but in fact very different firm-specific bad-news events: 1) filing a strategic Chapter 11, and 2) filing a financiallymotivated Chapter 11. We find that the market is unable to distinguish between the two in both the pre-event, and bankruptcy filing event, periods. In particular, in both cases, prices drop by around a half in risk-adjusted terms in the one-year pre-event window, falling a further 25% around the event date. On the other hand, we find that the subsequent market reaction to the announcement of strategic and non-strategic Chapter 11s is quite different. For non-strategic bankruptcies, there is a post-event drift of around -29% over the subsequent 12-months. Conversely, in the case of strategic bankruptcies, we uncover a reversal in the stock return pattern: risk-adjusted abnormal returns are now of +29% in the 6-month period following the event date. As such, filing for Court protection against creditors for non-strategic reasons seems to be increasingly perceived by the market as bad news over time, while filing a strategic bankruptcy becomes recognized over time as a positive news event. Complementary analysis reveals that a mix of information uncertainty issues, different trading environments and investors‟ help explaining our puzzling results. Nonetheless, trading in the stock of strategic bankruptcies appears to be a profitable strategy.