Market Reaction to Corporate Bankruptcy under Information Asymmetry

Abstract Book of the 11th International Conference on Research in Management and Economics

Year: 2026

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Market Reaction to Corporate Bankruptcy under Information Asymmetry

Qambar Abidi

ABSTRACT:

Bankruptcy regimes differ significantly in the degree of control retained by incumbent management during insolvency proceedings. In debtor-not-in-possession systems, control of the firm shifts from existing management to an external professional or trustee once bankruptcy proceedings begin. While such institutional arrangements are intended to strengthen creditor rights and improve resolution efficiency, they may also increase information asymmetry between insiders and market participants. This raises an important question regarding the ability of financial markets to process information and form expectations about the outcomes of corporate insolvency proceedings.
This study examines how stock markets respond to corporate bankruptcy filings within the institutional framework of India’s Insolvency and Bankruptcy Code (IBC), implemented in 2016. The IBC represents a significant shift in India’s insolvency framework by introducing a creditor-driven resolution process and replacing management control with an independent insolvency professional. Using evidence from publicly listed firms undergoing insolvency proceedings, the study investigates whether market reactions around bankruptcy filings reflect expectations regarding the eventual outcome of the insolvency process. In addition, the analysis considers whether periods of heightened economic uncertainty, such as the COVID-19 pandemic, influence the market’s response to bankruptcy-related events.
The findings provide insights into how financial markets interpret bankruptcy-related information under institutional conditions characterized by elevated information asymmetry. The study contributes to the literature on bankruptcy, market efficiency, and corporate restructuring in emerging markets, and offers implications for investors and policymakers in jurisdictions adopting creditor-driven insolvency frameworks.

Keywords: Bankruptcy outcomes; Insolvency and Bankruptcy Code; Event study; Emerging markets