Distress Risk and Stock Returns in An Emerging Market

Abstract

This study examines the link between financial distress and market performance of firm in the form of share performance by using Z-Score bankruptcy prediction model as the proxy of distress risk and the subsequent realized stock returns of the distress-listed companies as a proxy of systematic risk. The sample is drawn from Karachi Stock Exchange listed companies. We found that distress risk is not significant enough to explain the expected stock returns in the case of the Pakistani distress listed-firms. Altman’s (1968) measure of distress is operationalized to test the financial health of firms. The results show that distressed firms outperform as compare to healthy firms. This study deduces that distress risk is a systematic risk in relation to the Pakistani stock market to some extent.

Keywords: Financial distress, Share returns, KSE, Distressed companies, Bankruptcy risk, systematic risk