Distress and Issuance equals Portfolio Pain

Distress and Issuance equals Portfolio Pain

August 13, 2013 Research Insights
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(Last Updated On: January 18, 2017)

Equity Issuance and Returns to Distressed Firms


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.

Data Sources:

SDC Platinum and Placement Tracker. CRSP/Compustat. 1975-2009

Alpha Highlight:

Distressed high equity issuance stocks are terrible for your investment health.

The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request.

Strategy Summary:

  1. Calculate distress using logit estimates from Campbell et al.
  2. Calculate issuance.
  3. Identify the most distress and the highest issuance.
  4. Avoid these stocks like the plague.


  • Complicated methodology.
  • Can one make money on the short side?

Who wants to buy distress issuers? 

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Definitions of common statistics used in our analysis are available here (towards the bottom)

About the Author

Wesley R. Gray, Ph.D.

After serving as a Captain in the United States Marine Corps, Dr. Gray earned a PhD, and worked as a finance professor at Drexel University. Dr. Gray’s interest in bridging the research gap between academia and industry led him to found Alpha Architect, an asset management that delivers affordable active exposures for tax-sensitive investors. Dr. Gray has published four books and a number of academic articles. Wes is a regular contributor to multiple industry outlets, to include the following: Wall Street Journal, Forbes, ETF.com, and the CFA Institute. Dr. Gray earned an MBA and a PhD in finance from the University of Chicago and graduated magna cum laude with a BS from The Wharton School of the University of Pennsylvania.