Financial Distress, Market Anomalies and Single and Multifactor Asset Pricing Models: New Evidence

35 Pages Posted: 5 Jun 2002

See all articles by Syed I. Hussain

Syed I. Hussain

Nottingham University Business School

Steve Toms

University of Leeds - Leeds University Business School (LUBS); University of Leeds - Division of Accounting and Finance

Steve Diacon

Nottingham University Business School

Date Written: January 2002

Abstract

Data snooping and the nature of the distress premium are unresolved issues for the Fama and French three-factor model. These are addressed using UK data to create and test the model on portfolios based on market anomalies. We explore the apparent distress premium identified in prior research with particular reference to negative book equity-to-market equity (BE/ME) stocks. Although neglected in the prior research, we argue that these stocks offer new insights into the nature of the distress premium. We conclude that the distress premium is real and the three-factor model is an improvement on CAPM for all portfolios tested including the negative (BE/ME) portfolio. Unlike other distressed portfolios there is no compensation with high abnormal returns for this portfolio.

Keywords: Market Anomalies, Fama and French (1993) three-factor model, Negative book-to-market firms, financial distress, CAPM

JEL Classification: G12

Suggested Citation

Hussain, Syed I. and Toms, Steve and Diacon, Steve, Financial Distress, Market Anomalies and Single and Multifactor Asset Pricing Models: New Evidence (January 2002). Available at SSRN: https://ssrn.com/abstract=313001 or http://dx.doi.org/10.2139/ssrn.313001

Syed I. Hussain (Contact Author)

Nottingham University Business School ( email )

Jubilee Campus
Wollaton Road
Nottingham, NG8 1BB
United Kingdom
44-115 922 9076 (Phone)
44-115 956 6667 (Fax)

Steve Toms

University of Leeds - Leeds University Business School (LUBS) ( email )

Leeds LS2 9JT
United Kingdom

University of Leeds - Division of Accounting and Finance ( email )

Leeds LS2 9JT
United Kingdom

Steve Diacon

Nottingham University Business School ( email )

Jubilee Campus
Wollaton Road
Nottingham, NG8 1BB
United Kingdom
+44 115 951 5276 (Phone)
+44 115 951 262 (Fax)

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