Pricing corporate financial distress: Empirical evidence from the French stock market

Nada Mselmi, Taher Hamza, Amine Lahiani and Muhammad Shahbaz

Journal of International Money and Finance, 2019, vol. 96, issue C, 13-27

Abstract: This study examines whether financial distress, liquidity, and Value-at-Risk are sources of priced systematic risk in the stock returns of the French stock market. In particular, we investigate the explanatory power of the Fama and French (1993) model augmented by and substituted with these three risk factors for distressed and non-distressed firms. For this purpose, we construct nine portfolios composed of non-distressed firms and one portfolio consisting only of distressed firms. We find that for the portfolios of non-distressed firms, the financial distress factor is significantly priced only in the absence of the size and book-to-market factors. Not surprisingly, the financial distress is a systematic risk factor for the portfolio of distressed firms. Our findings also show that liquidity is priced for the portfolios of distressed and non-distressed firms. Furthermore, our empirical results show that only investors in the portfolios of non-distressed firms are rewarded for bearing Value-at-Risk (VaR) risk. Likewise, our findings indicate that the alternative model, constructed by substituting the Fama and French (1993) factors with the financial distress, liquidity and VaR risk factors, underperforms the Fama and French (1993) model, which, in turn, underperforms the considered augmented models. Our results provide insights both for international investors for new opportunities and for financial market supervisory authority.

Keywords: Equity pricing; Financial distress; Liquidity; Value-at-Risk; Systematic risk factors (search for similar items in EconPapers)
JEL-codes: G11 G12 G32 G33 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0261560619302402
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:96:y:2019:i:c:p:13-27

DOI: 10.1016/j.jimonfin.2019.04.008

Access Statistics for this article

Journal of International Money and Finance is currently edited by J. R. Lothian

More articles in Journal of International Money and Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().