 Liquidity, delistings, and credit risk premiumSu-Wen Kuo, Chin-Sheng Huang and Guan-Cih Jhang International Review of Economics & Finance, 2015, vol. 35, issue C, 78-89 Abstract: Our study analyzes in detail the results of the credit risk effect by using data from the unique rating environment of Taiwanese stock markets. Even in distinct institutional settings, our empirical results reaffirm the well-known inverse relationship of returns and credit risk, which is robust with regard to cross-sectional and time-series scrutiny. We reveal that the underperformance of low-rated firms around their rating downgrades, when they are subject to both severe illiquidity and short-sale constraints, partially explains the abnormal returns of long–short portfolios, although the returns remain substantial when data associated with downgrades is removed. When targeting delisted firms, we observe that delistings among the lowest-rated firms exhibit extremely poor returns near the time of their downgrades. We find that the abnormal returns become insignificant in the long–short portfolio in the sample, from which delistings are excluded. Our empirical evidence suggests that market mispricing of delisted stocks near the time of their downgrades is a primary cause of the credit risk puzzle. Keywords: Delisting; Illiquidity; Credit risk premium (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:reveco:v:35:y:2015:i:c:p:78-89 DOI: 10.1016/j.iref.2014.09.005 Access Statistics for this article International Review of Economics & Finance is currently edited by H. Beladi and C. Chen More articles in International Review of Economics & Finance from Elsevier |
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