Professor Cem Demiroglu will be presenting the paper "Do Market Prices Improve the Accuracy of Court Valuations in Chapter 11?"
The average misvaluation of newly issued stocks in Chapter 11 reorganizations exceeds 50%. Past studies attribute such large misvaluations to the absence of market forces. We show that public dissemination of transactions in defaulted bonds sharply reduces both court misvaluations and the resulting inter-claimant wealth transfers. The effects of dissemination are most pronounced when the disseminated bonds are actively traded and receive the majority of the newly issued stocks. Firm characteristics, time trends in judicial efficiency, or confounding events cannot explain these results. The evidence suggests that capital markets are better equipped to value a debtor than bargaining and judicial determination.