45 Pages Posted: 13 Jun 2017 Last revised: 20 Jun 2017
Date Written: June 19, 2017
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: 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
By Andrew Ang