Institutional preferences, demand shocks and the distress anomaly

Qing Ye, Yuliang Wu, Jia Liu

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    Our paper examines the distress anomaly on the Chinese stock markets. We show that the anomaly disappears after controlling for institutional ownership. We propose two hypotheses. The growing scale of institutional investors and changes in institutional preferences can generate greater demand shocks for stocks with low distress risk than those with high distress risk, causing the former to outperform the latter. Consistent with our hypotheses, the growth of institutions explains the anomaly when the institutional market share increases rapidly. We also show that institutional preferences for stocks with low distress risk have significantly increased over time and changes in preferences also explain the anomaly. Finally, momentum trading and gradual incorporation of distress information cannot account for the anomaly.
    Original languageEnglish
    Pages (from-to)72-91
    JournalThe British Accounting Review
    Issue number1
    Early online date1 May 2018
    Publication statusPublished - 1 Jan 2019


    • Institutional investors
    • Institutional preferences
    • Distress
    • The chinese stock markets


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