Bankruptcy Protection and Stock Market Behavior in the U.S. Airline Industry

By Dr. Stephen Gong

The predominantly positive stock price performance of the bankrupt airlines following the filing of bankruptcy (the selection and survivorship bias notwithstanding) indicates substantial improvement in the perceived financial condition of the airlines operating under bankruptcy protection. Interestingly, the rivals of the bankrupt airlines are found to benefit, rather than suffer, from the bankruptcy filings. Industry consolidation can result from the bankrupt airlines being acquired (or anticipated to be acquired) by healthy rivals, a situation that is consistent with the positive stock price performance for both the bankrupt firms and their competitors after the bankruptcy filings.

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