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The Importance of Cash‐Flow News for Financially Distressed Firms
Author(s) -
Eisdorfer Assaf
Publication year - 2007
Publication title -
financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.647
H-Index - 68
eISSN - 1755-053X
pISSN - 0046-3892
DOI - 10.1111/j.1755-053x.2007.tb00079.x
Subject(s) - cash flow , financial distress , monetary economics , stock (firearms) , economics , equity (law) , variance decomposition of forecast errors , financial economics , business , econometrics , finance , financial system , mechanical engineering , political science , law , engineering
Previous studies have shown that stock prices are moved primarily by news about discount rates (expected returns). I argue that when a firm experiences financial distress, news about cashflows becomes more dominant in driving its stock returns. Applying Campbell's (1991) variance decomposition framework to financially distressed firms supports this argument. Furthermore, I find that more bankruptcies occur after negative shocks to expected cashflows than after positive shocks to discount rates; and that stock prices of distressed firms are less sensitive than those of sound firms to changes in equity risk.