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Book‐to‐Market Equity, Distress Risk, and Stock Returns

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  • John M. Griffin
  • Michael L. Lemmon

Abstract

This paper examines the relationship between book‐to‐market equity, distress risk, and stock returns. Among firms with the highest distress risk as proxied by Ohlson's (1980) O‐score, the difference in returns between high and low book‐to market securities is more than twice as large as that in other firms. This large return differential cannot be explained by the three‐factor model or by differences in economic fundamentals. Consistent with mispricing arguments, firms with high distress risk exhibit the largest return reversals around earnings announcements, and the book‐to‐market effect is largest in small firms with low analyst coverage.

Suggested Citation

  • John M. Griffin & Michael L. Lemmon, 2002. "Book‐to‐Market Equity, Distress Risk, and Stock Returns," Journal of Finance, American Finance Association, vol. 57(5), pages 2317-2336, October.
    • Handle: RePEc:bla:jfinan:v:57:y:2002:i:5:p:2317-2336
    DOI: 10.1111/1540-6261.00497
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