Abstract

I examine the relation of distress risk to size, book-to-market, and momentum effects in China’s stock market. Consistent with the market underreaction hypothesis, I find that distressed firms underperform non-distressed firms in China’s stock market and the momentum factor proxies for distress risk in our sample period. My study also shows that the explanatory power of the momentum effect is subsumed when the distress factor is present.

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