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In Rememberance: World Trade Center (WTC)

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

by Zhi Da of the University of Notre Dame, and
Pengjie Gao of the University of Notre Dame

June 30, 2008

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.

Published in: Journal of Financial and Quantitative Analysis, Vol. 45, No. 1, (February 2010), pp. 27-48.

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