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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 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. |
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