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2015 Conference

du 15 au 16 October 2015

Orlando, FL

Welcome to the AFS Conference 2015 Schedule App. Please use the search features to see when your session or poster has been scheduled to take place. 

Risk-shifting, Equity Risk, and the Distress Puzzle

jeudi 15 octobre 2015 à 14:05–15:35 EDT
2-Gallery
Keywords: 5 words maximum

Financial Distress, Bankruptcy, Insolvency, Risk-Shifting, Credit Risk

Very short description for use in the program to help attendees understand more than a title can describe

This paper examines the relationship between financial distress and equity returns. Using strategic action proxies proposed by Davydenko and Strebulaev (2007), I find that financial distress is a robust and negative predictor of future stock returns apart from the effect of strategic actions taken by shareholders. This indicates that the distress puzzle cannot be fully explained by shareholder strategic actions (or shareholder advantages as proposed by Garlappi, Shu, and Yan 2008 and Garlappi and Yan 2011). The distress effect also cannot be explained by traditional risk factors, characteristics, or mispricing. However, the evidence in this paper is consistent with the risk-shifting hypothesis. Three findings support this claim. First, distressed firms tend to overinvest, earn low profits, and exhaust their cash flows. This effect is concentrated in low growth opportunity firms and hard-to-valuate firms. Second, the distress effect is concentrated in firms without credit ratings or convertible debt and in firms in which CEO have equity holdings. Third, distressed firms tend to have high credit spreads.

Lead & Corresponding Author

Dr. Jimmy Lockwood, Ph.D., Colorado State University
Job Title

Assistant Professor

Additional Authors

Dr. Keming Li, Ph.D., University of Minnesota – Duluth
Job Title
Dr. Hong Miao, Ph.D., Colorado State University
Job Title
Chargement en cours …