This paper has benefited, in particular, from the comments of the anonymous referee as well as, among others, Michael Boldin, Jonathan Crook, Weimen Liu, Craig Nicholls, Norman Strong, and Sudi Sudarsanam, and participants at the annual meetings of the Financial Management Association, American Accounting Association, European Financial Management Association, British Accounting Association, and INQUIRE UK, and research seminars held at Lancaster University, University of Manchester, and Cass Business School.
Does Financial Distress Risk Drive the Momentum Anomaly?
Version of Record online: 25 AUG 2008
© 2008 Financial Management Association International.
Volume 37, Issue 3, pages 461–484, Autumn 2008
How to Cite
Agarwal, V. and Taffler, R. (2008), Does Financial Distress Risk Drive the Momentum Anomaly?. Financial Management, 37: 461–484. doi: 10.1111/j.1755-053X.2008.00021.x
- Issue online: 25 AUG 2008
- Version of Record online: 25 AUG 2008
This paper brings together the evidence on two asset pricing anomalies—continuation of prior returns (momentum) and the market mispricing of distressed firms—using UK data. Our analysis demonstrates both these effects are driven by market underreaction to financial distress risk. In particular, we find momentum is proxying for distress risk, and is largely subsumed by our distress risk factor. We also find, as with US studies, no evidence that size and book-to-market (B/M) effects in stock returns are linked to financial distress.