 In search of distress premium in the Chinese energy sectorXuan Zhang, Zhekai Zhang, Liao Xu and Zhiping Zhou Energy Economics, 2024, vol. 129, issue C Abstract: We explore the link between the Chinese firms' default probabilities and their stock returns with an emphasis on the energy sector. We show that energy stock portfolios sorted by probability of default (PD) demonstrate a return reversal pattern, in which the distressed energy portfolio earns a higher return than its adjacent portfolio. In contrast, PD-sorted portfolios for all Chinese A-share stocks demonstrate a strong distress anomaly puzzle. We find the energy sector distress premium, measured by buying distressed energy stocks and selling distressed stocks in other sectors, earns a significant return, and is not explained by the standard or energy factors. However, this premium is vulnerable to extreme market conditions. In a structural framework of credit premium, we exploit specific properties of the Chinese energy sector, such as the high proportion of state-owned enterprises (SOEs) and their importance to China's energy transition goals, to explain our empirical results. Keywords: Default risk; Energy firms; Distress anomaly puzzle (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:129:y:2024:i:c:s0140988323007442 DOI: 10.1016/j.eneco.2023.107246 Access Statistics for this article Energy Economics is currently edited by R. S. J. Tol, Beng Ang, Lance Bachmeier, Perry Sadorsky, Ugur Soytas and J. P. Weyant More articles in Energy Economics from Elsevier |
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