Essays on distress risk and stock returns

Abstract

Essay 1. Understanding the Distress Puzzle: Surprises in the Pre-Delisting Period This study decomposes realized returns into expected and unexpected returns and shows that the persistently low unexpected returns two years before a firm’s delisting due to financial distress (the pre-delisting period) drive the negative cross-sectional relation between distress risk and realized stock returns documented in previous studies. Investors are surprised by lower-than-expected firms’ earnings and stock returns in the pre-delisting period, especially around earnings announcements when they correct their valuatio..