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Clientele Change, Liquidity Shock, and the Return on Financially Distressed Stocks

Published online by Cambridge University Press:  11 January 2010

Zhi Da  and
Pengjie Gao
Zhi Da
Affiliation:
Mendoza College of Business, University of Notre Dame, Notre Dame, IN 46556. zda@nd.edu
Pengjie Gao
Affiliation:
Mendoza College of Business, University of Notre Dame, Notre Dame, IN 46556. pgao@nd.edu
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Abstract

We show that the abnormal returns on high default risk stocks documented by Vassalou and Xing (2004) are driven by short-term return reversals rather than systematic default risk. These abnormal returns occur only during the month after portfolio formation and are concentrated in a small subset of stocks that had recently experienced large negative returns. Empirical evidence supports the view that the short-term return reversal arises from a liquidity shock triggered by a clientele change.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 45 , Issue 1 , February 2010 , pp. 27 - 48
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2010

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