Anomalies and financial distress |
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Authors: | Doron Avramov Tarun Chordia Gergana Jostova Alexander Philipov |
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Institution: | 1. School of Business, The Hebrew University of Jerusalem, Jerusalem, Israel;2. Goizueta Business School, Emory University, Atlanta, GA 30322, USA;3. School of Business, George Washington University, Washington, DC 20052, USA;4. School of Management, George Mason University, MSN 5F5, 4400 University Drive, Fairfax, VA 22030, USA |
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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. |
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Keywords: | Asset pricing anomalies Financial distress Credit ratings |
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