Learning about Distress
Christian C. Opp
University of Pennsylvania - The Wharton School
April 8, 2015
I develop an analytically tractable dynamic asset pricing model to study expected returns of financially distressed firms in the presence of learning and investor activism. Learning critically affects distressed stocks' valuations and risk exposures as information about solvency is essential for firm survival in distress. Informational externalities from active investors thus can also have first-order effects on distress risk premia. The presented model can shed light on a variety of empirical regularities related to financial distress, such as distressed firms' apparent stock market underperformance, momentum return dynamics, and negative abnormal returns after private placements of public equity involving active investors.
Number of Pages in PDF File: 48
Keywords: learning, financial distress, distress anomaly, momentum, active investors, PIPEs
Date posted: November 27, 2012 ; Last revised: April 10, 2015