Anomalies and Financial Distress
Hebrew University of Jerusalem
Emory University - Department of Finance
George Washington University - Department of Finance
George Mason University - Finance Area
April 3, 2012
Journal of Financial Economics (JFE), Forthcoming
This paper explores commonalities across asset-pricing anomalies. In particular, we assess implications of financial distress for the profitability of anomaly-based trading strategies. Strategies based on price momentum, earnings momentum, credit risk, dispersion, idiosyncratic volatility, and capital investments derive their profitability from taking short positions in high credit risk firms that experience deteriorating credit conditions. In contrast, the value-based strategy derives most of its profitability from taking long positions in high credit risk firms that survive financial distress and subsequently realize high returns. The accruals anomaly is an exception - it is robust among high and low credit risk firms in all credit conditions.
Keywords: asset-pricing anomalies, market efficiency, credit rating, credit risk
JEL Classification: G12, G14Accepted Paper Series
Date posted: July 1, 2012
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