Understanding the Distress Puzzle: Surprises in the Pre-Delisting Period
59 Pages Posted: 25 Jan 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
Date Written: January 13, 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 ex post delisting from the stock exchange 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. In the pre-delisting period, (i) ex post realized returns diverge from ex ante expected returns, otherwise they are similar across the sample period; and (ii) distressed firms experience unexpectedly low earnings per share and negative price adjustments around earnings announcements. The price adjustments reflect investors’ correction of their valuation errors about distressed firms’ future prospect.
Keywords: Distress risk, Delisting, Bankruptcy, Expected return, Asset-pricing anomaly, Earnings announcement
JEL Classification: G12, G14, G33
Suggested Citation: Suggested Citation
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