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Clientele Change, Liquidity Shock, and the Return on Financially Distressed Stocks

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  • Da, Zhi
  • Gao, Pengjie

Abstract

We show that the abnormal returns on high default risk stocks documented by Vassalou and Xing (2004) are driven by short-term return reversals rather than systematic default risk. These abnormal returns occur only during the month after portfolio formation and are concentrated in a small subset of stocks that had recently experienced large negative returns. Empirical evidence supports the view that the short-term return reversal arises from a liquidity shock triggered by a clientele change.

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  • Da, Zhi & Gao, Pengjie, 2010. "Clientele Change, Liquidity Shock, and the Return on Financially Distressed Stocks," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 45(01), pages 27-48, February.
  • Handle: RePEc:cup:jfinqa:v:45:y:2010:i:01:p:27-48_00
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    Cited by:

    1. Charitou, Andreas & Dionysiou, Dionysia & Lambertides, Neophytos & Trigeorgis, Lenos, 2013. "Alternative bankruptcy prediction models using option-pricing theory," Journal of Banking & Finance, Elsevier, vol. 37(7), pages 2329-2341.
    2. Ye, Qing & Turner, John D., 2014. "The cross-section of stock returns in an early stock market," International Review of Financial Analysis, Elsevier, vol. 34(C), pages 114-123.
    3. Kim, Gi H. & Li, Haitao & Zhang, Weina, 2016. "CDS-bond basis and bond return predictability," Journal of Empirical Finance, Elsevier, pages 307-337.
    4. Che-Min Chen & Han-Hsing Lee, 2013. "Default Risk, Liquidity Risk, and Equity Returns: Evidence from the Taiwan Market," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 49(1), pages 101-129, January.
    5. Yeh, Chung-Ying & Hsu, Junming & Wang, Kai-Li & Lin, Che-Hui, 2015. "Explaining the default risk anomaly by the two-beta model," Journal of Empirical Finance, Elsevier, pages 16-33.
    6. Thiago de Oliveira Souza, 2013. "Discount rates, market frictions and the mystery of the size premium," 2013 Papers pde868, Job Market Papers.
    7. Pilar Abad & Antonio Diaz & M. Dolores Robles-Fernandez, 2011. "Determinants of trading activity after rating actions in the Corporate Debt Market," Documentos de Trabajo del ICAE 2011-37, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico.
    8. Ferreira Filipe, Sara & Grammatikos, Theoharry & Michala, Dimitra, 2016. "Pricing default risk: The good, the bad, and the anomaly," Journal of Financial Stability, Elsevier, pages 190-213.
    9. Cai, Jie & Zhang, Zhe, 2011. "Leverage change, debt overhang, and stock prices," Journal of Corporate Finance, Elsevier, vol. 17(3), pages 391-402, June.
    10. Che-Min Chen & Han-Hsing Lee, 2013. "Default Risk, Liquidity Risk, and Equity Returns: Evidence from the Taiwan Market," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 49(1), pages 101-129, January.
    11. Michael S. O'Doherty, 2012. "On the Conditional Risk and Performance of Financially Distressed Stocks," Management Science, INFORMS, pages 1502-1520.
    12. Conrad, Jennifer & Kapadia, Nishad & Xing, Yuhang, 2014. "Death and jackpot: Why do individual investors hold overpriced stocks?," Journal of Financial Economics, Elsevier, vol. 113(3), pages 455-475.
    13. Ferreira Filipe, Sara & Grammatikos, Theoharry & Michala, Dimitra, 2014. "Pricing Default Risk: The Good, The Bad, and The Anomaly," MPRA Paper 53373, University Library of Munich, Germany.
    14. Chris Godfrey & Chris Brooks, 2015. "The Negative Credit Risk Premium Puzzle: A Limits to Arbitrage Story," ICMA Centre Discussion Papers in Finance icma-dp2015-07, Henley Business School, Reading University.
    15. Chen, Long & Zhang, Gaiyan & Zhang, Weina, 2016. "Return predictability in the corporate bond market along the supply chain," Journal of Financial Markets, Elsevier, vol. 29(C), pages 66-86.

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