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Misvaluation and Return Anomalies in Distress Stocks

Author

Listed:
  • Assaf Eisdorfer

    (University of Connecticut)

  • Amit Goyal

    (University of Lausanne; Ecole Polytechnique Fédérale de Lausanne, and Swiss Finance Institute)

  • Alexei Zhdanov

    (Pennsylvania State University)

Abstract

Return anomalies are most pronounced among distressed stocks. We attribute this finding to the role of misvaluation and investors' inability to value distressed stocks correctly. We treat distressed stocks as options and construct a valuation model that explicitly takes into account the value of the option to default (or abandon the firm). We show that anomalies exist only among the subset of distressed stocks classified as misvalued by our model. There is little evidence that more misvalued stocks are harder to arbitrage than less misvalued stocks.

Suggested Citation

  • Assaf Eisdorfer & Amit Goyal & Alexei Zhdanov, 2012. "Misvaluation and Return Anomalies in Distress Stocks," Swiss Finance Institute Research Paper Series 12-12, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp1212
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    File URL: http://ssrn.com/abstract=2025051
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    Cited by:

    1. Chris Godfrey & Chris Brooks, 2015. "The Negative Credit Risk Premium Puzzle: A Limits to Arbitrage Story," ICMA Centre Discussion Papers in Finance icma-dp2015-07, Henley Business School, University of Reading.
    2. Arati Kale & Devendra Kale & Sriram Villupuram, 2024. "Decomposition of risk for small size and low book-to-market stocks," Journal of Asset Management, Palgrave Macmillan, vol. 25(1), pages 96-112, February.

    More about this item

    Keywords

    Financial Distress; Return Anomalies; Misvaluation;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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