Download this Paper Open PDF in Browser

Understanding the Behavior of Distressed Stocks

45 Pages Posted: 13 Jun 2017 Last revised: 20 Jun 2017

Yasser Boualam

University of North Carolina (UNC) at Chapel Hill - Kenan-Flagler Business School

Joao F. Gomes

The Wharton School

Colin Ward

University of Minnesota - Carlson School of Management

Date Written: June 19, 2017

Abstract

This paper argues that the seemingly lower returns on distressed stocks are the result of estimation bias and proposes a simple theoretical correction that can be applied in practice. The bias emerges because highly distressed stocks possess equity betas that display countercyclical nonlinear movements that are not well captured by simple linear factor pricing models. Empirically, we find that these biases can be quite large for abnormal excess returns and that after implementing our proposed correction we see little evidence of underperformance for portfolios of distressed stocks in the data.

Keywords: Distress Anomaly, Asset Pricing, Bias, Nonlinear Estimation

JEL Classification: G11,G12

Suggested Citation

Boualam, Yasser and Gomes, Joao F. and Ward, Colin, Understanding the Behavior of Distressed Stocks (June 19, 2017). Available at SSRN: https://ssrn.com/abstract=2985004

Yasser Boualam

University of North Carolina (UNC) at Chapel Hill - Kenan-Flagler Business School ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States

HOME PAGE: http://www.yasserboualam.com

João Gomes

The Wharton School ( email )

2329 SH-DH
3620 Locust Walk
Philadelphia, PA 19104
United States
215-898-3666 (Phone)
215-898-6200 (Fax)

HOME PAGE: http://fnce.wharton.upenn.edu/profile/gomesj/

Colin Ward (Contact Author)

University of Minnesota - Carlson School of Management ( email )

Carlson School of Management
321 19th Avenue South
Minneapolis, MN 55455
United States

Paper statistics

Downloads
213
Rank
123,596
Abstract Views
758