Analyst Ratings for Firms in Distress

• In Event: Public Interest Considerations

Abstract

We examine analyst followings of the firms from one year prior to filing Chapter 11 and as they progress through bankruptcy proceedings and focus on firms receiving “Hold” or better recommendations. We attempt to answer questions such as (1) What are the common characteristics of the firms receiving stronger than expected recommendations one year prior to filing for bankruptcy reorganization or while in bankruptcy? (2) How does the market react to the issuance of stronger ratings for those firms? We find that the probability of securing stronger ratings is higher for small firms and for those followed by a greater number of analysts than for large firms with fewer analysts. The market becomes more skeptical of optimistic evaluations the closer to the actual filing of bankruptcy (perhaps reflecting some anticipation) and reacts more positively to rating upgrades issued during bankruptcy than to the upgrades issued prior to bankruptcy filing.

Authors

• Elena Precourt, Bryant University

• Henry Oppenheimer, University of Rhode Island