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Book‐to‐Market Equity, Distress Risk, and Stock Returns
Author(s) -
Griffin John M.,
Lemmon Michael L.
Publication year - 2002
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/1540-6261.00497
Subject(s) - equity (law) , financial distress , earnings , stock (firearms) , distress , economics , stock market , financial economics , risk–return spectrum , business , financial system , finance , portfolio , psychology , mechanical engineering , paleontology , horse , political science , law , biology , engineering , psychotherapist
This paper examines the relationship between book‐to‐market equity, distress risk, and stock returns. Among firms with the highest distress risk as proxied by Ohlson's (1980) O‐score, the difference in returns between high and low book‐to market securities is more than twice as large as that in other firms. This large return differential cannot be explained by the three‐factor model or by differences in economic fundamentals. Consistent with mispricing arguments, firms with high distress risk exhibit the largest return reversals around earnings announcements, and the book‐to‐market effect is largest in small firms with low analyst coverage.