{"id":198931,"date":"2023-11-13T15:10:04","date_gmt":"2023-11-13T20:10:04","guid":{"rendered":"https:\/\/ibkrcampus.com\/?p=198931"},"modified":"2023-11-15T08:51:57","modified_gmt":"2023-11-15T13:51:57","slug":"playing-musical-chairs-with-bankrupt-shares","status":"publish","type":"post","link":"https:\/\/www.interactivebrokers.com\/campus\/traders-insight\/securities\/stocks\/playing-musical-chairs-with-bankrupt-shares\/","title":{"rendered":"Playing Musical Chairs with Bankrupt Shares"},"content":{"rendered":"\n

\u201cBounces in bankrupt companies have gone from bizarre to routine.\u201d<\/p>\n\n\n\n

\u201cAs long as there are buyers willing to play musical chairs with [a bankrupt] stock, hoping to trade it from the long side for a profit until the shares are delisted after being declared truly worthless by the bankruptcy court, we\u2019ll see this type of behavior[.]\u201d<\/p>\n\n\n\n

These were among the quotes that I offered to a reporter last week when she reported<\/a> on the jump in WeWork (WEWKQ) shares in the aftermath of its bankruptcy declaration.  The same sort of social media spirit that led to outsized bounces in meme stocks has led to similar types of jumps in stocks after they announced their Chapter 11 filings. While it is entirely possible for nimble traders to surf the waves in low priced stocks that are under bankruptcy court protection, it is important for traders to understand that the fundamental value of the common stocks in most of these companies is zero. Nil. Zilch. Nada.<\/p>\n\n\n\n

This is not my opinion — this is a fact of how bankruptcy law works.i<\/sup> There are two basic types of corporate bankruptcy filings: Chapter 7 and Chapter 11. In the former, the company\u2019s assets are liquidated. In the latter, which is more common (the type of filing used by WEWKQ<\/a>), the company attempts to restructure its obligations while continuing to operate under court supervision.  <\/p>\n\n\n\n

In all corporate bankruptcies there is a basic premise that one must keep in mind. If the bondholders won\u2019t get paid, the stockholders almost certainly will get nothing. Bankruptcy is about the orderly discharge of debts, and debtholders sit above equity owners when a company must be unwound. This is evident in the way that equity exists on a company\u2019s balance sheet. It is the net of total assets minus total liabilities. If a company\u2019s assets exceed its liabilities, then there is positive equity (\u201cbook value\u201d). If liabilities exceed assets \u2013 the type of thing that causes companies to declare bankruptcies \u2013 then the company has negative equity. Negative equity means that there is nothing left for shareholders.<\/p>\n\n\n\n

In the case of WEWKQ, they were quite explicit about the value of the common stock. From the Form 8-K that announced its filing<\/a>:<\/p>\n\n\n\n