The Distress Anomaly is Deeper than You Think: Evidence from Stocks and Bonds

Doron Avramov, Tarun Chordia, Gergana Jostova*, Alexander Philipov

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

5 Scopus citations

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.

Original languageAmerican English
Pages (from-to)355-405
Number of pages51
JournalReview of Finance
Volume26
Issue number2
DOIs
StatePublished - 1 Mar 2022
Externally publishedYes

Bibliographical note

Publisher Copyright:
© 2021 The Author(s) 2021. Published by Oxford University Press on behalf of the European Finance Association. All rights reserved. For permissions, please email: journals.permissions@oup.com.

Keywords

  • Anomalies
  • Bonds
  • Distress puzzle
  • G12
  • G14
  • Overpricing
  • Real effects
  • Stocks

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