The Dynamics of Informed Trading Around Corporate Bankruptcies

We investigate the dynamics of informed trading both before and after corporate bankruptcy announcements. We develop an improved empirical approach for estimating the daily probability of informed trading in a stock, which overcomes challenges in prior literature when dealing with large intraday data. Using our improved daily measures of informed trading, we document evidence of informed selling in the month before bankruptcy announcements. We find that pre-announcement informed selling attenuates subsequent announcement stock returns. In addition, the effect of informed selling on subsequent stock returns is weaker for bankrupt firms that receive more media coverage or adverse news sentiment during the pre-announcement period. We further show that pre-announcement informed trading is most likely driven by private information and post-announcement informed trading can predict subsequent bankruptcy outcomes