Learning, Active Investors, and the Returns of Financially Distressed Firms

I develop an analytically tractable dynamic asset pricing model to study expected returns of financially distressed firms in the presence of learning about firm fundamentals and endogenous information acquisition by active investors. The model reveals that learning and information acquisition critically affect lowfrequency risk exposures close to default and can, counter to standard models, rationalize low and even negative expected return premia for firms with high default risk. Similar to Schumpeter’s (1934) argument that recessions have a positive, cleansing effect on the economy, the model reveals that equity holders naturally benefit from an increased speed of learning about truly insolvent firms in downturns, which positively affects the value of their default option in these times. Equity holders’ option value is similarly enhanced by the ability to partially freeride on active investors’ information acquisition. Learning thus dynamically affects distressed firms’ exposures to business-cycle frequency risks and can rationalize striking, momentum-type dynamics in risk premia

In Search of Distress Risk

This paper explores the determinants of corporate failure and the pricing of financially distressed stocks using US data over the period 1963 to 2003. Firms with higher leverage, lower profitability, lower market capitalization, lower past stock returns, more volatile past stock returns, lower cash holdings, higher market-book ratios, and lower prices per share are more likely to file for bankruptcy, be delisted, or receive a D rating. When predicting failure at longer horizons, the most persistent firm characteristics, market capitalization, the market-book ratio, and equity volatility become relatively more significant. Our model captures much of the time variation in the aggregate failure rate. Since 1981, financially distressed stocks have delivered anomalously low returns. They have lower returns but much higher standard deviations, market betas, and loadings on value and small-cap risk factors than stocks with a low risk of failure. These patterns hold in all size quintiles but are particularly strong in smaller stocks. They are inconsistent with the conjecture that the value and size effects are compensation for the risk of financial distress.

Value Premium In The Chinese Stock Market：Free Lunch Or Paid Lunch?

In this paper we examine the time-series predictability of the book-to-market (B/M) ratio for annual and monthly portfolio returns in the Chinese stock market.  We find that value premiums exist throughout our sample period of 1998 to 2008. However, the predictability of B/M appears to be unrelated with financial distress risk. In fact, value stocks are less risky than growth stocks in terms of return volatility and estimated financial distress risk. Further, our results suggest that the factor VMG, which is directly related to value premium, is not a pervasive risk measure compared to market factor and SMB. While the size effect seems to be closely related to distress risk, both size and B/M factors do not appear to be driven by financial distress risk

Do analysts know but not say? The case of goingconcern opinions

This study explores whether security analysts recognize firms’ going-concern problems and report appropriately to investors. We find that analysts signal their anticipation of the publication of a going-concern modified (GCM) audit report in two ways: 1) they downgrade more aggressively stock recommendations of GCM firms than stock recommendations of control firms as the event date approaches; 2) they are more likely to cease coverage of a GCM firm than a control firm over the one-year period prior to the GCM date. We further show that analysts react to the publication of an actual GCM audit report by stopping coverage of such firms immediately subsequent to the event disclosure. Our results suggest that analysts know that the future viability of GCM firms is jeopardized but do not say it clearly to retail investors, who constitute the main clientele of these firms. Consistent with the SEC concerns about analyst recommendations, we conclude that investors cannot rely solely on analyst recommendations since they are reluctant to report negatively (i.e, “underperform” or “sell”) even in this extreme bad news domain. We further conclude that analyst relative pessimism and coverage cessation is likely to be associated with negative expectations about firms’ future prospects.Analyst behaviour, stock recommendations, bad news announcements, goingconcern reports.

Are Capital Structure Decisions of Family-Owned SMEs Different? Empirical Evidence From Portugal

This study analyses if ownership structure is an important determinant of capital structure decisions, on basis of two sub-samples of family-owned and non-family owned SMEs, sing panel data models. The results suggest that family ownership is an important determinant for: i) the variations of short and long-term debt stimulated by the financial deficit; and ii) the rate of adjustment of short and long-term debt toward the respective target levels. The empirical evidence obtained in this study suggests that family-owned firms have the possibility to reach their target short and long-term debt ratios, corroborating the assumptions of Trade-Off Theory. Whereas non-family owned firms follow almost exclusively the behaviour forecasted by Pecking Order Theory, i.e., when internal finance is insufficient, those firms turn to short-term debt, and their variations of short-term debt are almost exclusively a consequence of the financial deficit.Family-Owned SMEs, Long-Term Debt; Non-Family Owned SMEs, Panel Data Models, Short-Term Debt.

Essays in empirical finance

This thesis contains three essays on the role of incentives in financial decisions. The first essay documents how airlines financial choices are affected by the threat of future competition. The second essay explores the role of cross-trading in mutual fund families. The third essay shows the effect of stock undepricing on innovation spending

Why some Distressed Firms Have Low Expected Returns. ( Revised in September. 2007 )

In recent years, empirical researchers show that firms with higher credit risk have much smaller average stock returns. This finding is opposite to the risk-reward principle and is often attributed to mispricing and market anomalies. We investigate how credit risk and expected stock return are determined in a model with production, capital structure and aggregate uncertainty. We show that, contrary to the conventional wisdom, a firm with higher credit risk can have less risky stock than the one with lower credit risk.

Financing, fire sales, and the stockholder wealth effects of asset divestiture announcements

We thank Dimitris Andriosopoulos, Leonidas Barbopoulos, Robert Faff, Russell Gregory-Allan, Krishna Paudyal, Amandeep Sahota, Jianren Xu, participants at the 2015 European Accounting Association Annual Congress (Glasgow), 2015 Financial Management Association European Conference (Venice), 2015 Financial Management Association Annual Meeting (Orlando), and seminar participants at the University of Strathclyde for helpful comments on earlier versions of this work. We also thank Martin Kemmitt for helpful research assistance. All errors remain our own.Peer reviewedPostprin

Is There Hedge Fund Contagion?

We examine whether hedge funds experience contagion. First, we consider whether extreme movements in equity, fixed income, and currency markets are contagious to hedge funds. Second, we investigate whether extreme adverse returns in one hedge fund style are contagious to other hedge fund styles. To conduct this examination, we estimate binomial and multinomial logit models of contagion using daily returns on hedge fund style indices as well as monthly returns on indices with a longer history. Our main finding is that there is no evidence of contagion from equity, fixed income, and foreign exchange markets to hedge funds, except for weak evidence of contagion for one single daily hedge fund style index. By contrast, we find strong evidence of contagion across hedge fund styles, so that hedge fund styles tend to have poor coincident returns.