Why people buy stock in bankrupt companies [Bloomberg businessweek, May 23, 2011]
Kary (2011) dealt with the phenomenon of investing in publicly traded companies that have declared bankruptcy. Such companies would appear (to most people) to be a poor choice as an investment vehicle. Kary (2011) pointed out however, that a surprising number of investor seek out such companies for investment.
Investing in publicly traded companies that have filed for bankruptcy protection is especially surprising in that the only investment vehicle open to general investors is equity stock in such companies. In the event of dissolution, common equity stock holders are on the lowest ring of the corporate totem pole - behind government agencies, mortgage holders, secured creditors, unsecured creditors, employees with wages due, bond holders, and preferred stock holders. The likelihood of any payout to common equity stock holders in the event of dissolution is negligible.
Kary (2011) wanted to know why investors would expose themselves to such a risk level. She uncovered several reasons. Some investors believed that companies would recover and emerge from bankruptcy protection. Other investors harbored beliefs that more liquid assets were available than were being disclosed. Still other investors were willing to assume the risk on the belief that the equity stocks of companies in bankruptcy would fall sufficiently low and be sufficiently price volatile to enable the investors by profit by trading the shares of such companies. Kary (2011) found, however, that the proportion of companies that provide returns to common equity investors subsequent to bankruptcy declaration has been falling steadily for three decades - from 78% in 1982 to 44% in 1996 to 10% in 2010.
From the perspective of this writer, the practice of continual buying and selling in the equity shares of companies in b
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