Financial distress and jump tail risk: Evidence from China's listed companies

Xiaoqun Liu, Yuchen Zhang, Mengqiao Tian and Youcong Chao

International Review of Economics & Finance, 2023, vol. 85, issue C, 316-336

Abstract: The imperfect delisting system is a big barrier for Chinese listed companies to obtain efficient bankruptcy applications. We redefine financial distress and take a closer look at how jump tail risk can aggravate the possibility of financial distress. Empirical analysis shows: a logistic model involving jump tail risk can predict the possibility of financial distress well; portfolio analysis and Fama-MacBeth regression confirm that jump tail risk may contribute to the low return for distressed stocks, verifying the so-called financial distress puzzle in China. Further, the mechanism analysis demonstrates that analyst coverage and investor sentiment are potential resources for financial distress. This study provides a more practical measure to estimate and investigate the financial distress anomaly in China.

Keywords: Financial distress anomaly; Jump tail risk; Logistic regression (search for similar items in EconPapers)
JEL-codes: C53 G11 G12 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:85:y:2023:i:c:p:316-336

DOI: 10.1016/j.iref.2023.01.007

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