Distress and Issuance equals Portfolio Pain
Equity Issuance and Returns to Distressed Firms
- James L Park
- A version of the paper can be found here.
- Want a summary of academic papers with alpha? Check out our free Academic Alpha Database!
Previous literature is inconclusive about whether distressed firms issue equity. Using a portfolio approach to all traded firms, I find a strong positive relationship between distress and equity issuance. When the cross-section of firms is sorted by degree of distress, the mean monthly net issuance rate increases monotonically from 0.10% for the safest decile portfolio to 1.13% for the most distressed. Using a large database that includes both public and private issuance, I find that the hump-shape distribution of public issuance and the monotonically increasing distribution of private issuance together represent the increasing CRSP issuance population in the cross-section of distress. Moreover, I find that the low abnormal returns of distressed firms are concentrated in those firms that issue the most equity. Thus, the positive relationship between equity issuance is important in understanding the equity issuance and return patterns of distressed firms.
SDC Platinum and Placement Tracker. CRSP/Compustat. 1975-2009
Distressed high equity issuance stocks are terrible for your investment health.
- Calculate distress using logit estimates from Campbell et al.
- Calculate issuance.
- Identify the most distress and the highest issuance.
- Avoid these stocks like the plague.
- Complicated methodology.
- Can one make money on the short side?
Who wants to buy distress issuers?
Note: This site provides NO information on our value investing ETFs or our momentum investing ETFs. Please refer to this site.
Join thousands of other readers and subscribe to our blog.
Please remember that past performance is not an indicator of future results. Please read our full disclosures. The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Alpha Architect, its affiliates or its employees. This material has been provided to you solely for information and educational purposes and does not constitute an offer or solicitation of an offer or any advice or recommendation to purchase any securities or other financial instruments and may not be construed as such. The factual information set forth herein has been obtained or derived from sources believed by the author and Alpha Architect to be reliable but it is not necessarily all-inclusive and is not guaranteed as to its accuracy and is not to be regarded as a representation or warranty, express or implied, as to the information’s accuracy or completeness, nor should the attached information serve as the basis of any investment decision. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission from Alpha Architect.
Definitions of common statistics used in our analysis are available here (towards the bottom)