Impact of reorganization announcements on distressed-stock returns

In this study, we show the potential substantial gains from identifying the attributes of firms whose stock prices are likely to rise as a consequence of reorganization. Our study indicates that an ex ante trading strategy of investing in distressed stocks with a respective 30.65% and 46.77% likelihood of being a winner on the dates of reorganization filing and filing confirmation and holding the stocks for a month can generate average cumulative abnormal returns of + 25.438% and + 27.956%, respectively.We further compare the performance of three input selection techniques relative to the rank of input importance as well as demonstrate the predictability of distressed-stocks investment using hybrid GA-BPNs. We find that the generalization ability of the GA-BPNs can be harnessed in creating an effective and efficient tool for distressed-stock selection to a high degree of accuracy and investors can, then, translate the often-confusing lexicon of the reorganization process into a lucrative investment vehicle.