Understanding the Distress Puzzle: Surprises in the Pre-Delisting Period
77 Pages Posted: 22 Aug 2011 Last revised: 28 Feb 2012
There are 4 versions of this paper
Understanding the Distress Puzzle: Surprises in the Pre-Delisting Period
Understanding the Distress Puzzle: Surprises in the Pre-Delisting Period
Understanding the Distress Puzzle: Surprises in the Pre-Delisting Period
Understanding the Distress Puzzle: Surprises in the Pre-Delisting Period
Date Written: February 27, 2012
Abstract
This study shows that the negative cross-sectional relation between distress risk and stock returns documented in previous studies is driven by the persistently low ex post realized returns in the pre-delisting period – the two-year period prior to a firm’s delisting due to financial distress. After controlling for the firm-months in the pre-delisting period, which constitutes only 0.3% of total market capitalization or 3%–5% of NYSE/AMEX/Nasdaq firm-months, distress risk is positively related to ex post realized returns. Ex post realized returns and firms’ earnings per share meet investors’ ex ante expectations for bearing distress risk, but they disappoint investors in the pre-delisting period, which prompt investors to correct their valuation errors around earnings announcements and the delisting month.
Keywords: Distress risk, Delisting, Bankruptcy, Expected return, Implied cost of capital, Asset-pricing anomaly, Earnings announcement
JEL Classification: G12, G14, G33
Suggested Citation: Suggested Citation
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