Industry Distress Anomaly

63 Pages Posted: 26 Mar 2024 Last revised: 30 Apr 2025

See all articles by Hui Chen

Hui Chen

Massachusetts Institute of Technology

Winston Wei Dou

University of Pennsylvania - The Wharton School; National Bureau of Economic Research (NBER)

Hongye Guo

The University of Hong Kong - University of Hong Kong

Yan Ji

Hong Kong University of Science & Technology (HKUST)

Date Written: April 30, 2025

Abstract

We document  a robust and significant industry financial distress anomaly. The industry distress anomaly remains significant after controlling for the firm distress anomaly, but it does not exist in placebo industries, constructed by reshuffling firms across real industries. To rationalize the industry distress anomaly, we propose an industry equilibrium model with endogenous strategic competition. Central to the model is the competition-distress feedback within industries, which amplifies the exposure of industries' profit margins and equity returns to aggregate discount-rate shocks. Industries with higher idiosyncratic left-tail risks are more distressed, yet are endogenously less exposed to aggregate shocks due to the weaker competition-distress feedback, implying lower expected equity returns.

Keywords: Stock and Bond Returns, Supergames, Tacit Collusion, Financial Distress Anomaly (JEL: G12

JEL Classification: G12, L13, O33, C73

Suggested Citation

Chen, Hui and Dou, Winston Wei and Guo, Hongye and Ji, Yan, Industry Distress Anomaly (April 30, 2025). The Wharton School Research Paper, Available at SSRN: https://ssrn.com/abstract=4738806 or http://dx.doi.org/10.2139/ssrn.4738806

Hui Chen

Massachusetts Institute of Technology ( email )

50 Memorial Drive
Cambridge, MA 02142
United States
+1 (617) 324-3896 (Phone)

Winston Wei Dou (Contact Author)

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

HOME PAGE: http://www.nber.org/people/winston_wei_dou?page=1&perPage=50

Hongye Guo

The University of Hong Kong - University of Hong Kong ( email )

Pokfulam Road
Hong Kong, Hong Kong
China

Yan Ji

Hong Kong University of Science & Technology (HKUST) ( email )

Clearwater Bay
Kowloon, 999999
Hong Kong

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