Understanding the Distress Puzzle: Surprises in the Pre-Delisting Period

77 Pages Posted: 22 Aug 2011 Last revised: 28 Feb 2012

See all articles by Tze Chuan 'Chewie' Ang

Tze Chuan 'Chewie' Ang

Deakin University - Department of Finance; Financial Research Network (FIRN)

Multiple version iconThere are 4 versions of this paper

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

Ang, Tze Chuan, Understanding the Distress Puzzle: Surprises in the Pre-Delisting Period (February 27, 2012). 24th Australasian Finance and Banking Conference 2011 Paper, Available at SSRN: https://ssrn.com/abstract=1914420 or http://dx.doi.org/10.2139/ssrn.1914420

Tze Chuan Ang (Contact Author)

Deakin University - Department of Finance ( email )

221 Burwood Highway
Burwood, Victoria 3125
Australia
+61 3 9244 6626 (Phone)

HOME PAGE: http://www.deakin.edu.au/profiles/tze-ang

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia,
Brisbane, Queensland 4071
Australia

HOME PAGE: http://www.firn.org.au

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
96
Abstract Views
1,203
Rank
138,079
PlumX Metrics