The Position Of The Stockholder In Corporate Bankruptcy

Daniel S. Vinger

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The fate of a stockholder's investment in declining corporation depends on what the company does before and during bankruptcy. It is certainly possible that the firm may end up being liquidated with the stockholder loosing everything. On the other hand, the company can be bought by another firm, merge with a more successful entity, or even successfully reorganize alone to become a highly profitable firm. Just which of these events will come to pas~ is not always certain. It depends on the legal environment the company is faced with before and after the bankruptcy decision is made. In addition, market and financial factors influence this chain of events. Finally, and most importantly, the way a company's management acts in times of austerity and crisis may be the best indication of the future fate of the business.

An investor must be alert to changes in the bankruptcy laws and their interpretation; he or she must also actively assess the market, financial conditions, and management's decisions in this environment. The rewards for the vigilant stockholder are clear, while the costs of neglect are also apparent. This paper will highlight the recent laws and court decisions effecting bankruptcy. It gives insight into the possible actions a firm can take as it enters this turbulent phase of its life. Finally, it consolidates the opinions of financial writers concerning the subject of bankruptcy which stockholders can use for investment decisions before, during, and after bankruptcy.