Misvaluation and Return Anomalies in Distress Stocks
University of Connecticut - Department of Finance
University of Lausanne; Ecole Polytechnique Fédérale de Lausanne - Swiss Finance Institute
Pennsylvania State University
March 15, 2012
AFA 2013 San Diego Meetings Paper
Return anomalies are most pronounced among distressed stocks. We attribute this finding to the role of misvaluation and investors' inability to value distressed stocks correctly. We treat distressed stocks as options and construct a valuation model that explicitly takes into account the value of the option to default (or abandon the rm). We show that anomalies exist only among the subset of distressed stocks classified as misvalued by our model. There is little evidence that more misvalued stocks are harder to arbitrage than less misvalued stocks.
Number of Pages in PDF File: 47
Keywords: financial distress, return anomalies, misvaluation
JEL Classification: G12, G13, G33
Date posted: March 17, 2012
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