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Limit to Arbitrage and Distress Risk Puzzle in Vietnam: Does Corporate Bankruptcy Regulation Matter?

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  • Khoa Dang Duong
  • Ngoc Thi Thanh Nguyen
  • Nga Thu Thi Do
  • Hoa Thanh Phan Le

Abstract

This study is the first to examine how limit-to-arbitrage factors impact the distress risk puzzle in Vietnam before and after implementing bankruptcy regulations. Our research utilizes asset pricing models, portfolio sorting methodologies, and the Fama and French four-factor model to analyze an unbalanced panel with 35,255 firm-month observations from non-financial firms in the Vietnam stock market from 2008 to 2021. We find a persistent negative correlation between distress risk and corporate profitability, even after accounting for limit-to-arbitrage factors. Notably, this trend is more pronounced among larger firms. Intriguingly, the distress risk puzzle disappears after the introduction of bankruptcy regulations. Additionally, we observe that limit-to-arbitrage factors suppress stock returns due to mispricing issues, supporting liquidity risk theory. Our study provides valuable insights into the distress risk puzzle, especially in emerging markets. JEL Classification: G11, G12, G14.

Suggested Citation

  • Khoa Dang Duong & Ngoc Thi Thanh Nguyen & Nga Thu Thi Do & Hoa Thanh Phan Le, 2024. "Limit to Arbitrage and Distress Risk Puzzle in Vietnam: Does Corporate Bankruptcy Regulation Matter?," SAGE Open, , vol. 14(2), pages 21582440241, May.
    • Handle: RePEc:sae:sagope:v:14:y:2024:i:2:p:21582440241255676
    DOI: 10.1177/21582440241255676
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    References listed on IDEAS

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    More about this item

    Keywords

    limit to arbitrage; distress risk puzzle; bankruptcy regulation; Vietnam;
    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
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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