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Financial distress and jump tail risk: Evidence from China's listed companies

Author

Listed:
  • Liu, Xiaoqun
  • Zhang, Yuchen
  • Tian, Mengqiao
  • Chao, Youcong

Abstract

The imperfect delisting system is a big barrier for Chinese listed companies to obtain efficient bankruptcy applications. We redefine financial distress and take a closer look at how jump tail risk can aggravate the possibility of financial distress. Empirical analysis shows: a logistic model involving jump tail risk can predict the possibility of financial distress well; portfolio analysis and Fama-MacBeth regression confirm that jump tail risk may contribute to the low return for distressed stocks, verifying the so-called financial distress puzzle in China. Further, the mechanism analysis demonstrates that analyst coverage and investor sentiment are potential resources for financial distress. This study provides a more practical measure to estimate and investigate the financial distress anomaly in China.

Suggested Citation

  • Liu, Xiaoqun & Zhang, Yuchen & Tian, Mengqiao & Chao, Youcong, 2023. "Financial distress and jump tail risk: Evidence from China's listed companies," International Review of Economics & Finance, Elsevier, vol. 85(C), pages 316-336.
    • Handle: RePEc:eee:reveco:v:85:y:2023:i:c:p:316-336
    DOI: 10.1016/j.iref.2023.01.007
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    More about this item

    Keywords

    Financial distress anomaly; Jump tail risk; Logistic regression;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods

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