The Global Relation between Financial Distress and Equity Returns
The Review of Financial Studies, Forthcoming
86 Pages Posted: 19 Jun 2012 Last revised: 3 Jun 2017
Date Written: October 24, 2016
Abstract
This study explores the distress risk anomaly — the tendency for stocks with high credit risk to perform poorly — among 38 countries over two decades. We find a strong, negative link between default probabilities and equity returns, concentrated among low-capitalization stocks in developed countries in North America and Europe. Although risk-based explanations provide a poor account of these patterns, several pieces of evidence point to a behavioral interpretation, suggesting that stocks of firms in financial distress are temporarily overpriced.
Keywords: financial distress, equity return, individualism, overconfidence
JEL Classification: G12, G14
Suggested Citation: Suggested Citation
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