the market sees a 13% chance of a favorable outcome

PSA: this is not how stock price works.

I thought it was; help me understand where I'm wrong.

I mean, yeah, the more optimistic the market is, the higher the price goes. But comparing % like this doesn't make any sense.

If the price rises by 120%, the market see a 120% chance of favorable outcome?

The probability distribution is not binary win/lose

Occasionally the equity holders get some value during the restructuring process.

Because it already crashed before the trading halt. It's down over 98% from peak.

As I understand from this "The Plain Bagel" video [0], they're not bankrupt. Instead, they're likely nearing the completion of their debt restructuring.

[0] https://www.youtube.com/watch?v=c-n6RN8a2Zo

They're restructuring their debt because they're bankrupt.

The problem is the term "bankruptcy". Colloquially people seem to think a company is just out of money. All you need to file for bankruptcy is to be unable to service debts at a specific time. It might even just be a transitory state.

A company is insolvent when liabilities exceed assets. Companies can remain insolvent indefinitely unless they miss a payment at which point a creditor can force them into bankruptcy where a court oversees liquidation.

Evergrande is insolvent and is now bankrupt. There is no reasonable scenario here where the company continues to operate as a growing concern.

TIL, more than one time of insolvency: https://en.wikipedia.org/wiki/Insolvency

Bed Bath and Beyond and Sears helped me realize that the cold eyes sanity of investors is often overstated. These were both bankrupt companies who developed stockholders with cultish beliefs around the company's ongoing viability.

With Evergrande, I imagine some people believe it might be important enough for China that it may someday get a bailout. I don't believe it.

On the other hand, Hertz.

You got me, that was a crazy train I would never ride and it paid off generously.

I agree with you, but it might not be completely irrational to buy an about to be bankrupt company. If the assets on book is sufficiently larger than the stock price, investors might get a payout when it gets sold off after fees. When Enron was liquidated, the last investors that bought the stock ended with an 8x RoI (according to an Acquired episode). Still an insane gamble obviously.

Short sellers can use bankruptcy as a way of closing out their positions and also in the process provide some market and liquidity. Short sellers borrowed stock and sold it based on the belief that the stock was going to drop in price and need to buy the stock to return it.

Institutional investors will attempt to liquidate but are largely locked in as significant sales will take the price to zero. It is the irrational retail investors who see the stock trading above zero and believe that “smart money” is accumulating shares.

If a company goes bankrupt, short sellers do not have to buy the stock to return it. The stock ceases to exist and the position is closed.

https://www.investopedia.com/ask/answers/maintain-short-posi...

Agreed about irrational retail investors keeping the price of Bed Bath and Beyond and Sears above $0.

Hilariously, the creditors/BBY management saw the price and sold stock into that crowd right before bankruptcy. The prospectus literally said something like "we plan to go into bankruptcy soon and this stock will be worthless, it's just providing slightly more value for our creditors" but meme stock traders bought it anyway.

Stonks?

I will buy your shares for 0 if you’ve got any

that is not how bankruptcy works. it does not mean everything zero. it is process of paying creditors. what is left is paid to shareholders.

Right. But assets < liabilities means that “what is left” is nothing.

On paper before the bankruptcy process happens. There is often a restructuring, assuming the business can become a going concern again.

Shareholders have no priority and the only hope for shareholders to recover anything would be through government intervention (e.g. American International Group). The value in Evergrande was entirely in its financial engineering capabilities and not in its construction expertise. The loss of confidence means that the financial side of the business has zero value now and nobody would be give them new money today even if excess liabilities magically disappeared and the construction side is severely impaired as there is little demand for new apartments.

Restructuring doesn’t create money out of thin air. If the bondholders aren’t paid off in full, there’s nothing left for equity.

Same reason company executives and employees still collect a paycheck. Shareholders have the power to appoint new company executives which has some value.