Institutional preferences, demand shocks and the distress anomaly

Ye, Q; Wu, Y; Liu, JL

Abstract

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.


Key words: institutional investors, institutional preferences, distress, the Chinese stock markets

Citation

Ye, Q., Wu, Y., & Liu, J. (2019). Institutional preferences, demand shocks and the distress anomaly. British Accounting Review, 51(1), 72-91. https://doi.org/10.1016/j.bar.2018.04.003

• Journal Article Type: Article
• Acceptance Date: Apr 25, 2018
• Online Publication Date: May 1, 2018
• Publication Date: Jan 1, 2019
• Deposit Date: May 21, 2018
• Publicly Available Date: May 1, 2020
• Journal: British Accounting Review
• Print ISSN: 0890-8389
• Publisher: Elsevier
• Volume: 51
• Issue: 1
• Pages: 72-91
• DOI: https://doi.org/10.1016/j.bar.2018.04.003
• Publisher URL: https://doi.org/10.1016/j.bar.2018.04.003
• Related Public URLs: https://www.journals.elsevier.com/the-british-accounting-review