GM and Market Overexuberance?

Yesterday, General Motors had to remind investors that when it emerges from bankruptcy, its common stock will be worthless. Why did they have to do this? Well, apparently GM stock has undergone several days straight of heavy trading, and they cannot really figure out why anyone is buying up equity that will soon be worthless.

According to the GM press release, “GM management continues to remind investors of its strong belief that there will be no value for the common stockholders in the bankruptcy liquidation process, even under the most optimistic of scenarios.”

Weird. Why exactly would people buy up stock that has no resale value? One answer is that until the end of the bankruptcy, the stock will have some value, but this doesn’t make sense under an efficient market hypothesis. As long as it is known that the stock eventually will have no value, someone down the line will not be able to sell it. So, even if there is a cue of buyers waiting to buy GM shares, the last guy would not pay for it. If the last guy won’t pay, then the next to last guy won’t buy, and so on. As soon as the bankruptcy started, the stock should cease trading.

I am not sure why GM is still trading; it has been de-listed, and it should be worth nothing. Perhaps the stock market is not as efficient as we would like to believe.