The Importance of Cash‐Flow News for Financially Distressed Firms

Assaf Eisdorfer

Financial Management, 2007, vol. 36, issue 3, 33-48

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.

Date: 2007
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