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Industry Distress Anomaly

Author

Listed:
  • Hui Chen
  • Winston Wei Dou
  • Hongye Guo
  • Yan Ji

Abstract

We document a robust industry-level distress anomaly in which more distressed industries earn significantly lower expected equity returns. The anomaly is distinct from the firm-level distress anomaly (Campbell, Hilscher and Szilagyi, 2008). It remains significant after controlling for firm-level distress but disappears in placebo industries formed by randomly reshuffling firms across actual industries. Both theoretically and empirically, we show that competition-distress feedback amplifies the exposure of industry profit margins and equity returns to discount-rate shocks. Industries with greater idiosyncratic left-tail risk are more distressed but exhibit weaker competition-distress feedback. This effect reduces their exposure to discount-rate shocks and thus lowers their expected equity returns.

Suggested Citation

  • Hui Chen & Winston Wei Dou & Hongye Guo & Yan Ji, 2026. "Industry Distress Anomaly," NBER Working Papers 35513, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:35513
    Note: AP CF EFG IO
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    More about this item

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes

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