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

Zhi Da and Pengjie Gao

Journal of Financial and Quantitative Analysis, 2010, vol. 45, issue 1, 27-48

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.

Date: 2010
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