An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

Vineet Agarwal
Cranfield School of Management

Richard Taffler
Edinburgh University

Abstract: This paper brings together the evidence on two asset pricing anomalies – continuation of prior returns (momentum) and the market mispricing of distressed firms. Our empirical analysis demonstrates both these effects are driven by market underreaction to bankruptcy risk, in particular, we find momentum is proxying for distress risk and is largely subsumed by our distress risk factor. We also find no evidence that size and B/M effects in stock returns are linked to financial distress.

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