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The Effect of Junk Bond Defaults on Common Stock Returns

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  • Vu, Joseph D

Abstract

This paper examines the effect of junk bond defaults on common stock returns. The evidence indicates that stockholders uncover the signs of financial distress long before the default date. Stock prices fall sharply at the time of the default announcement. Although stocks of fallen angel sample recover slowly and steadily after the default announcement, stocks of the original-issue junk bond sample continue to decline. On average, bankrupt firms suffer larger negative stock returns than defaulted firms not only at the time of announcement, but also in both pre- and post-event periods. Copyright 1998 by MIT Press.

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  • Vu, Joseph D, 1998. "The Effect of Junk Bond Defaults on Common Stock Returns," The Financial Review, Eastern Finance Association, vol. 33(4), pages 47-60, November.
    • Handle: RePEc:bla:finrev:v:33:y:1998:i:4:p:47-60
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    Cited by:

    1. Ngene, Geoffrey M. & Lee Kim, Yea & Wang, Jinghua, 2019. "Who poisons the pool? Time-varying asymmetric and nonlinear causal inference between low-risk and high-risk bonds markets," Economic Modelling, Elsevier, vol. 81(C), pages 136-147.

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