The Importance of Cash-Flow News for Financially Distressed Firms |
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Authors: | Assaf Eisdorfer Assistant Professor of Finance |
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Institution: | University of Connecticut, Starrs, CT. |
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Abstract: | Previous studies have shown that stock prices are moved primarily by news about discount rates (expected returns). I argue that when a firm experiences financial distress, news about cashflows becomes more dominant in driving its stock returns. Applying Campbell's (1991) variance decomposition framework to financially distressed firms supports this argument. Furthermore, I find that more bankruptcies occur after negative shocks to expected cashflows than after positive shocks to discount rates; and that stock prices of distressed firms are less sensitive than those of sound firms to changes in equity risk. |
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