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Anomalies and financial distress

Author

Listed:
  • Avramov, Doron
  • Chordia, Tarun
  • Jostova, Gergana
  • Philipov, Alexander

Abstract

This paper explores commonalities across asset pricing anomalies. In particular, we assess implications of financial distress for the profitability of anomaly-based trading strategies. Strategies based on price momentum, earnings momentum, credit risk, dispersion, idiosyncratic volatility, and capital investments derive their profitability from taking short positions in high credit risk firms that experience deteriorating credit conditions. In contrast, the value-based strategy derives most of its profitability from taking long positions in high credit risk firms that survive financial distress and subsequently realize high returns. The accruals anomaly is an exception. It is robust among high and low credit risk firms in all credit conditions.

Suggested Citation

  • Avramov, Doron & Chordia, Tarun & Jostova, Gergana & Philipov, Alexander, 2013. "Anomalies and financial distress," Journal of Financial Economics, Elsevier, vol. 108(1), pages 139-159.
  • Handle: RePEc:eee:jfinec:v:108:y:2013:i:1:p:139-159
    DOI: 10.1016/j.jfineco.2012.10.005
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    References listed on IDEAS

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    More about this item

    Keywords

    Asset pricing anomalies; Financial distress; Credit ratings;

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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