The Disappeared Outperformance of Post-Reorg Equity

Using trading information from a comprehensive sample of relisted Chapter 11 firms in the past few decades, we find that an equal-weighted calendar-time portfolio generates 7.2% annualized excess returns over a five-factor benchmark from 1992 to 2019. However, the outperformance concentrated in the 2000s, when institutional ownership of post-reorganization equity increased significantly. The positive post-emergence earnings announcement returns disappear in the most recent decade. The evidence suggests that the outperformance of post-reorg equity documented in earlier studies is most likely due to market expectation errors for future earnings and, thus, initial undervaluation, which has been corrected in the recent period by sophisticated institutional investors.