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Distress risk anomaly and misvaluation

Distress risk anomaly and misvaluation
Distress risk anomaly and misvaluation
This paper examines the effects of misvaluation on the well-documented negative relation between distress risk and stock returns (distress risk anomaly). Findings indicate that distress risk is negatively related to subsequent stock returns only in the subset of the most overvalued stocks, which is consistent with mispricing explanations provided by prior studies. The distress anomaly disappears after controlling for mispricing effects. Further analysis reveals earnings management to be one possible cause for the overvaluation of highly distressed firms. The results are robust to alternative specifications of distress risk and mispricing measures.
Asset pricing anomalies, Distress risk, Earnings management, Mispricing
0890-8389
Andreou, Christoforos K.
7e3cbbe0-1d81-407d-aa00-acee91c04d9a
Lambertides, Neophytos
72605971-9577-486d-9800-38a7f072a2c6
Panayides, Photis M.
ccf6affe-2eb8-45fa-abcd-d0419353da64
Andreou, Christoforos K.
7e3cbbe0-1d81-407d-aa00-acee91c04d9a
Lambertides, Neophytos
72605971-9577-486d-9800-38a7f072a2c6
Panayides, Photis M.
ccf6affe-2eb8-45fa-abcd-d0419353da64

Andreou, Christoforos K., Lambertides, Neophytos and Panayides, Photis M. (2021) Distress risk anomaly and misvaluation. British Accounting Review, 53 (5), [100972]. (doi:10.1016/j.bar.2020.100972).

Record type: Article

Abstract

This paper examines the effects of misvaluation on the well-documented negative relation between distress risk and stock returns (distress risk anomaly). Findings indicate that distress risk is negatively related to subsequent stock returns only in the subset of the most overvalued stocks, which is consistent with mispricing explanations provided by prior studies. The distress anomaly disappears after controlling for mispricing effects. Further analysis reveals earnings management to be one possible cause for the overvaluation of highly distressed firms. The results are robust to alternative specifications of distress risk and mispricing measures.

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Distress Risk Anomaly and Misvaluation - 2021 - Accepted Manuscript
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Accepted/In Press date: 9 December 2020
e-pub ahead of print date: 18 December 2020
Published date: 1 September 2021
Keywords: Asset pricing anomalies, Distress risk, Earnings management, Mispricing

Identifiers

Local EPrints ID: 453779
URI: http://eprints.soton.ac.uk/id/eprint/453779
ISSN: 0890-8389
PURE UUID: eb099aaf-b33a-4621-8b70-8335a34f3797
ORCID for Christoforos K. Andreou: ORCID iD orcid.org/0000-0002-5395-4807

Catalogue record

Date deposited: 24 Jan 2022 17:48
Last modified: 28 Apr 2022 02:33

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Contributors

Author: Neophytos Lambertides
Author: Photis M. Panayides

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