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The Distress Anomaly is Deeper than You Think: Evidence from Stocks and Bonds
[The prediction of corporate bankruptcy: a discriminant analysis]

Author

Listed:
  • Doron Avramov
  • Tarun Chordia
  • Gergana Jostova
  • Alexander Philipov

Abstract

The distress anomaly reflects the abnormally low returns of high credit risk stocks during financial distress. Evidence from stocks and corporate bonds reinforces the anomaly and challenges rationales based on shareholders’ ability to extract value from bondholders, time-varying betas, lottery-type preferences, biased earnings expectations, and limits-to-arbitrage. Moreover, mispricing of distressed stocks and bonds is associated with excess investment and excess external financing. Potential real distortions are materially understated when assessed based only on equity mispricing. We emphasize the important role of corporate bonds in dissecting the distress anomaly, and show that the anomaly is an unresolved puzzle.

Suggested Citation

  • Doron Avramov & Tarun Chordia & Gergana Jostova & Alexander Philipov, 2022. "The Distress Anomaly is Deeper than You Think: Evidence from Stocks and Bonds [The prediction of corporate bankruptcy: a discriminant analysis]," Review of Finance, European Finance Association, vol. 26(2), pages 355-405.
    • Handle: RePEc:oup:revfin:v:26:y:2022:i:2:p:355-405.
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    File URL: http://hdl.handle.net/10.1093/rof/rfab025
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    More about this item

    Keywords

    Distress puzzle; Real effects; Anomalies; Overpricing; Stocks; Bonds;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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