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Question: Can bankrupt companies stay in the Dow?

Evan Thome

Answer:

Dear Evan,

The answer is no. You may be wondering about General Motors, which is in the process of filing for bankruptcy.

The Dow Jones Industrial Average, which measures the stock price movements of 30 actively traded U.S. corporations, does not include companies that file for bankruptcy protection.

You may recall that in a Q&A last fall we discussed a change in the Dow when American International Group (AIG) was dropped because it was in serious financial trouble. AIG was replaced in late September by Kraft Foods.

GM’s bankruptcy, expected to be formalized any day now, might also mean it will be delisted from the New York Stock Exchange. We use the word “might” because there is one company under bankruptcy protection that still trades on the NYSE and that is W.R. Grace.

The NYSE would probably delist General Motors if the exchange was not confident about the automaker’s ability to handle its debts and other financial issues. Another possible causes for delisting –- if the stock trades below a certain price –- although the exchange has not made public what that dollar amount would be.

One thing you might want to do is note what stock replaces GM in the Dow. (And in the S&P 500 if it’s dropped there.) Any replacement company will get a boost from an initial burst of publicity. And, it’s always possible that it will be a good blue chip company!

For details on how the Dow works: www.dowjones.com
For details on the NYSE listing standards: www.nyse.com

Good luck!

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