Bankruptcy protection and stock market behavior in the US airline industry

Abstract

This study examines the effects of bankruptcy protection on the stock market behavior of US airlines and their domestic rivals. We find that Chapter 11 airlines experience both statistically and economically significant adverse price changes at the time of filing for bankruptcy. During the close-to-3 years after filing, however, these airlines experience significantly positive price changes. Their rivals experience significantly positive price reactions both at the time of the filing and up to 3 years post-filing. The evidence is consistent with substantial improvement in the financial condition of the bankrupt airlines after the reorganization, and with rivals gaining from the failures of other airlines.