Review of Financial Studies Vol. 31 No. 1 2018

Global Relation between Financial Distress and Equity Returns

Pengjie Gao¹; Christopher A. Parsons²; Jianfeng Shen³

¹ Mendoza College of Business, University of Notre Dame · ² Marshall School of Business, University of Southern California Rady School of Management, University of California at San Diego · ³ UNSW Business School, University of New South Wales

Abstract

Recent studies conflict sharply about the stock returns of financially distressed firms. Both the basic empirical pattern and interpretation have been challenged. This study addresses both critiques. Analyzing about 4.3 million firm-months observations in 38 countries from January 1992 to June 2013, we find a strong, negative link between credit risk and subsequent equity returns, concentrated among low-capitalization stocks in developed countries in North America and Europe. Comparisons between countries reveal: 1) no relation to creditor rights, inconsistent with theories based on shareholders expropriation, but 2) a strong, positive relation to individualism, a proxy for investor overconfidence. Additional analysis using within-country proxies for investor overconfidence further supports an overconfidence-based explanation.

DOI

10.1093/rfs/hhx060

Volume

31

Issue

1

Pages

239-277

Language

en

Sources

crossref openalex

Cite

APA 7 MLA 9 Chicago (author–date) Harvard Elsevier Harvard (JFE, JBF…) The Accounting Review Academy of Management American Marketing Association INFORMS (Management Science) Copy citation Copied ✓