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Clientele Change, Liquidity Shock, and the Return on Financially Distressed Stocks

Published online by Cambridge University Press:  11 January 2010

Zhi Da
Mendoza College of Business, University of Notre Dame, Notre Dame, IN 46556.
Pengjie Gao
Mendoza College of Business, University of Notre Dame, Notre Dame, IN 46556.


We show that the abnormal returns on high default risk stocks documented by Vassalou and Xing (2004) are driven by short-term return reversals rather than systematic default risk. These abnormal returns occur only during the month after portfolio formation and are concentrated in a small subset of stocks that had recently experienced large negative returns. Empirical evidence supports the view that the short-term return reversal arises from a liquidity shock triggered by a clientele change.

Research Articles
Copyright © Michael G. Foster School of Business, University of Washington 2010

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