The dynamics of informed trading around corporate bankruptcies

Abstract

We investigate the dynamics of informed trading both before and after corporate bankruptcy announcements using high frequency data. Our findings reveal that pre-announcement informed selling attenuates subsequent announcement returns, with this effect being weaker for firms receiving extensive pre-announcement media coverage or adverse news sentiment. We also find that post-announcement informed trading can serve as a predictor of subsequent bankruptcy outcomes. Overall, results are consistent with there being material information leakage, warranting policy efforts to better safeguard less informed investors.