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Article

Investor Overreaction to Technical Insolvency
and Bankruptcy Risks in the 2008
Stock Market Crash

Jia Wang, Gulser Meric, Zugang Liu and Ilhan Meric
The Journal of Investing Summer 2013, 22 (2) 8-14; DOI: https://doi.org/10.3905/joi.2013.22.2.008
Jia Wang
is an associate professor of finance in Rohrer College of Business, Rowan University in Glassboro, NJ.
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  • For correspondence: wangji@rowan.edu
Gulser Meric
is a professor of finance in Rohrer College of Business, Rowan University in Glassboro, NJ.
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  • For correspondence: meric@rowan.edu
Zugang Liu
is an assistant professor of business administration in the Department of Business and Economics, Penn State University in Hazleton, PA.
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  • For correspondence: ZXL23@psu.edu
Ilhan Meric
is a professor of finance in the College of Business Administration, Rider University in Lawrenceville, NJ.
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  • For correspondence: meric@rider.edu
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Abstract

Thaler and De Bondt [1985] demonstrate that investors may overreact to economic events. Studying investor overreaction to economic events has been a popular research topic in finance. However, investor overreaction to certain firm characteristics during economic events has not received sufficient attention. In this article, we study investor overreaction to firm technical insolvency and bankruptcy risks in the 2008 stock market crash. We demonstrate that firms with high technical insolvency and bankruptcy risks lost more value relative to other firms in the 2008 crash. However, these firms gained more value relative to other firms in the post-crash market reversal, implying that investors overreacted to technical insolvency and bankruptcy risks in the 2008 crash. Although firms with a high bankruptcy risk also lost more value in the 1987 stock market crash, these firms did not gain more value relative to other firms in the post-crash market reversal, implying that there was no investor overreaction to bankruptcy risk in the 1987 crash.

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The Journal of Investing: 22 (2)
The Journal of Investing
Vol. 22, Issue 2
Summer 2013
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Investor Overreaction to Technical Insolvency
and Bankruptcy Risks in the 2008
Stock Market Crash
Jia Wang, Gulser Meric, Zugang Liu, Ilhan Meric
The Journal of Investing May 2013, 22 (2) 8-14; DOI: 10.3905/joi.2013.22.2.008

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Investor Overreaction to Technical Insolvency
and Bankruptcy Risks in the 2008
Stock Market Crash
Jia Wang, Gulser Meric, Zugang Liu, Ilhan Meric
The Journal of Investing May 2013, 22 (2) 8-14; DOI: 10.3905/joi.2013.22.2.008
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  • Article
    • Abstract
    • DATA
    • METHODOLOGY
    • REGRESSION RESULTS FOR THE 2008 CRASH AND POST-CRASH MARKET REVERSAL
    • REGRESSION RESULTS FOR THE 1987 CRASH AND POST-CRASH MARKET REVERSAL
    • SUMMARY AND CONCLUSIONS
    • REFERENCES
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