Clientele Change, Liquidity Shock, and the Return on Financially Distressed Stocks

58 Pages Posted: 17 Mar 2006

See all articles by Zhi Da

Zhi Da

University of Notre Dame - Mendoza College of Business

Pengjie Gao

University of Notre Dame - Mendoza College of Business

Date Written: November 29, 2005

Abstract

We provide empirical evidence supporting the view that a sharp rise in a firm's default likelihood causes a change in its shareholder clientele: mutual funds decrease their holdings of the firm's share, trading volume and cost increase, and the order imbalance measure indicates large selling pressure. The liquidity risk of the stock as measured by its exposure to the Pástor and Stambaugh (2003) liquidity factor rises. Liquidity risk of the stock returns to normal in the subsequent month and the stock price recovers. Such price recovery explains the first-month abnormal high return earned by stocks with high default likelihood documented in Vassalou and Xing (2004). The abnormal high return is mostly reward for providing liquidity when it is most needed.

Keywords: Clientele, Liquidity, Default Risk, Stock Return

JEL Classification: G12, G14

Suggested Citation

Da, Zhi and Gao, Pengjie, Clientele Change, Liquidity Shock, and the Return on Financially Distressed Stocks (November 29, 2005). AFA 2007 Chicago Meetings Paper. Available at SSRN: https://ssrn.com/abstract=870063 or http://dx.doi.org/10.2139/ssrn.870063

Zhi Da (Contact Author)

University of Notre Dame - Mendoza College of Business ( email )

Notre Dame, IN 46556-5646
United States

Pengjie Gao

University of Notre Dame - Mendoza College of Business ( email )

246 Mendoza College of Business
Notre Dame, IN 46556-5646
United States
(574) 631-8048 (Phone)

HOME PAGE: http://​sites.google.com/site/gpengjie/

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