Anomalies and Financial Distress
Posted: 1 Jul 2012
Date Written: April 3, 2012
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, G14
Suggested Citation: Suggested Citation