47 Pages Posted: 17 Mar 2012
Date Written: March 15, 2012
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.
Keywords: financial distress, return anomalies, misvaluation
JEL Classification: G12, G13, G33
Suggested Citation: Suggested Citation
Eisdorfer, Assaf and Goyal, Amit and Zhdanov, Alexei, Misvaluation and Return Anomalies in Distress Stocks (March 15, 2012). AFA 2013 San Diego Meetings Paper. Available at SSRN: https://ssrn.com/abstract=2023778 or http://dx.doi.org/10.2139/ssrn.2023778