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Distress Anomaly and Shareholder Risk: International Evidence

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  • Assaf Eisdorfer
  • Amit Goyal
  • Alexei Zhdanov

Abstract

Financially distressed stocks in the United States earn puzzlingly low returns giving rise to the distress risk anomaly. We provide evidence that the anomaly exists in developed countries, but not in emerging ones. Using cross‐country analyses, we explore several potential drivers of returns to distressed stocks. The distress anomaly is stronger in countries with stronger takeover legislation, lower barriers to arbitrage, and higher information transparency. In contrast, shareholder bargaining power and expected stock return skewness in a country do not affect the anomaly. These findings suggest that various aspects of shareholders’ risk play an important role in shaping distressed stocks returns.

Suggested Citation

  • Assaf Eisdorfer & Amit Goyal & Alexei Zhdanov, 2018. "Distress Anomaly and Shareholder Risk: International Evidence," Financial Management, Financial Management Association International, vol. 47(3), pages 553-581, September.
    • Handle: RePEc:bla:finmgt:v:47:y:2018:i:3:p:553-581
    DOI: 10.1111/fima.12203
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    3. Kim, Dongcheol & Lee, Inro & Na, Haejung, 2019. "Financial distress, short sale constraints, and mispricing," Pacific-Basin Finance Journal, Elsevier, vol. 53(C), pages 94-111.
    4. Cakici, Nusret & Zaremba, Adam, 2023. "Recency bias and the cross-section of international stock returns," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 84(C).
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    6. Li, Tangrong & Lin, Hui, 2021. "Credit risk and equity returns in China," International Review of Economics & Finance, Elsevier, vol. 76(C), pages 588-613.
    7. Gao, Li & He, Wei & Wang, Qian, 2019. "In search of distress risk in China's stock market," Global Finance Journal, Elsevier, vol. 42(C).

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