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

Author

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  • John M. Griffin

    (Arizona State University and Yale,)

  • Michael L. Lemmon

    (University of Utah)

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. Copyright The American Finance Association 2002.

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
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