Financial Distress and the Cross-section of Equity Returns

• 成果类型: Article
• 署名作者: Garlappi, Lorenzo; Yan, Hong
• 署名单位: University of British Columbia; University of South Carolina System; University of South Carolina Columbia; Shanghai Jiao Tong University
• 刊物名称: JOURNAL OF FINANCE
• ISSN/ISSBN: 0022-1082
• DOI: 10.1111/j.1540-6261.2011.01652.x
• 发表日期: 2011
• 页码: 789-822
• 关键词: ABSOLUTE PRIORITY; corporate-debt; DELISTING BIAS; default risk; STOCK; MARKET; momentum; INVESTMENT; deviations; bankruptcy

摘要

We explicitly consider financial leverage in a simple equity valuation model and study the cross-sectional implications of potential shareholder recovery upon resolution of financial distress. Our model is capable of simultaneously explaining lower returns for financially distressed stocks, stronger book-to-market effects for firms with high default likelihood, and the concentration of momentum profits among low credit quality firms. The model further predicts (i) a hump-shaped relationship between value premium and default probability, and (ii) stronger momentum profits for nearly distressed firms with significant prospects for shareholder recovery. Our empirical analysis strongly confirms these novel predictions.