A:

Occasionally, publicly listed companies go bankrupt. The company's shareholders, depending on the type of stock they hold, may be entitled to a portion of the liquidated assets, if there are any left over. However, the stock itself will become worthless, leaving shareholders unable to sell their defunct shares. Therefore, in the case of corporate bankruptcy, the only recourse is to hope that there is money left over from the firm's liquidated assets to pay the shareholders.

Upon bankruptcy, a firm will be required to sell all of its assets and pay off all debts. The usual order of debt repayment, in terms of the lender, will be the government, financial institutions, other creditors (i.e. suppliers and utility companies), bondholders, preferred shareholders and, finally, common shareholders. The common shareholders are last because they have a residual claim on the assets in the firm and are a tier below the preferred stock classification. Common shareholders often receive nothing at all, as there is usually very little left over once a firm has paid its debts.

The amount of the payment a common shareholder will receive is based on the proportion of ownership he or she has in the bankrupt firm. For example, suppose that a common stockholder owns 0.5% of the firm in question. If the firm has $100,000 to pay to its common shareholders post liquidation, this owner would receive a cash payment of $500.

If a shareholder owns preferred shares, he or she will have an increased chance of receiving a payment upon liquidation because this class of ownership has a higher claim on assets. (For further reading, see A Primer On Preferred Stocks and Knowing Your Rights As Shareholder.)

Investors should consider the possibility of bankruptcy when evaluating potential investments. Ratios, such as debt/equity and the book-value, can provide investors with a sense of what they may receive in the event of bankruptcy.

For more on this topic, read An Overview Of Corporate Bankruptcy.

RELATED FAQS

  1. Is a company's paid in capital affected by the trading of its shares in the secondary ...

    Find out why the buying and selling of stock on the secondary market has no impact on the amount of paid-in capital generated ...
  2. Why is the value of capital stock important to public shareholders?

    Understand what capital stock is and how it's issued and authorized. Learn why the value of capital stock important to public ...
  3. How do changes in capital stock illustrate the overall health of a company?

    Understand what capital stock is comprised of. Learn how changes in capital stock illustrate and provide insight into the ...
  4. What is the difference between Class A shares and other common shares of company's ...

    Discover how a company can break down its common stock into multiple classes and how these classes differ from one another ...
RELATED TERMS
  1. Accelerated Resolution Program (ARP)

    A program designed to reduce the time and cost of resolving failed ...
  2. Invoice Financing

    A way for businesses to borrow money based on amounts due from ...
  3. Altman Z-Score

    The output of a credit-strength test that gauges a publicly traded ...
  4. Estimated Recovery Value (ERV)

    The projected value of an asset that can be recovered in the ...
  5. Recovery Rate

    The extent to which principal and accrued interest on a debt ...
  6. Bankruptcy Court

    What is bankruptcy court?

You May Also Like

Related Articles
  1. Investing Basics

    What's the difference between Google's ...

  2. Stock Analysis

    Google Stock: A Tale of Two Share Classes

  3. Personal Finance

    7 Bankrupt Companies That Came Back

  4. Mutual Funds & ETFs

    Top 4 High-Yielding Preferred Stock ...

  5. Mutual Funds & ETFs

    Pros and Cons: Preferred Stock ETFs ...

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!