Get 20M+ Full-Text Papers For Less Than $1.50/day. Start a 14-Day Trial for You or Your Team.

Learn More →

Credit Risk and Anomalies in Pakistan’s Stock Market

Credit Risk and Anomalies in Pakistan’s Stock Market This paper investigates the relation between credit risk and stock return for publicly traded firms in the Pakistan Stock Exchange (PSX) over the period 2000–2017. Using credit ratings as a proxy for credit risk, we find that the credit risk–stock return relation is negative in Pakistan, as low‐rated stocks (i.e., those with high credit risk) earn lower returns than high‐rated stocks (i.e., those with low credit risk). This negative relation is robust to alternative measures of credit risk (e.g., Altman’s Z‐score and the distance‐to‐default) and is also maintained even after controlling for size, momentum, and liquidity effects. Our study provides evidence of the default‐risk anomaly in a frontier market that lacks adequate information infrastructure and faces high levels of political and economic uncertainty. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Asia-Pacific Journal of Financial Studies Wiley

Credit Risk and Anomalies in Pakistan’s Stock Market

Download PDF
36 pages

Loading next page...
 
/lp/wiley/credit-risk-and-anomalies-in-pakistan-s-stock-market-nwoB2FjYhX
Publisher
Wiley
Copyright
Copyright © 2019 Korean Securities Association
ISSN
2041-9945
eISSN
2041-6156
DOI
10.1111/ajfs.12280
Publisher site
See Article on Publisher Site

Abstract

This paper investigates the relation between credit risk and stock return for publicly traded firms in the Pakistan Stock Exchange (PSX) over the period 2000–2017. Using credit ratings as a proxy for credit risk, we find that the credit risk–stock return relation is negative in Pakistan, as low‐rated stocks (i.e., those with high credit risk) earn lower returns than high‐rated stocks (i.e., those with low credit risk). This negative relation is robust to alternative measures of credit risk (e.g., Altman’s Z‐score and the distance‐to‐default) and is also maintained even after controlling for size, momentum, and liquidity effects. Our study provides evidence of the default‐risk anomaly in a frontier market that lacks adequate information infrastructure and faces high levels of political and economic uncertainty.

Journal

Asia-Pacific Journal of Financial Studies – Wiley

Published: Dec 1, 2019

Keywords: ; ; ; ; ;

References

  • Does financial distress risk drive the momentum anomaly?
    Agarwal, V.; Taffler, R.
  • Financial ratios, discriminant analysis and the prediction of corporate bankruptcy
    Altman, E. I.
  • Illiquidity and stock returns: Cross‐section and time‐series effects
    Amihud, Y.
  • Do analysts really anchor? Evidence from credit risk and suppressed negative information
    Ashour, S.; Hao, G.
  • Momentum and credit rating
    Avramov, D.; Chordia, T.; Jostova, G.; Philipov, A.
  • Credit ratings and the cross‐section of stock returns
    Avramov, D.; Chordia, T.; Jostova, G.; Philipov, A.
  • Forecasting default with the Merton distance to default model
    Bharath, S.; Shumway, T.
  • In search of distress risk
    Campbell, J. Y.; Hilscher, J.; Szilagyi, J.
  • On persistence in mutual fund performance
    Carhart, M. M.
  • Structural and return characteristics of small and large firms
    Chan, L.; Chen, N.
  • An explanatory investigation of the firm size effect
    Chan, L.; Chen, N.; Hsieh, D.
  • Is default risk negatively related to stock returns?
    Chava, S.; Purnanandam, A.
  • Clientele change, liquidity shock, and the return on financially distressed stocks
    Da, Z.; Gao, P.
  • Is the risk of bankruptcy a systematic risk?
    Dichev, I. D.
  • Distress anomaly and shareholder risk: International evidence
    Eisdorfer, A.; Goyal, A.; Zhdanov, A.
  • The cross‐section of expected stock returns
    Fama, E. F.; French, K. R.
  • Common risk factors in the returns on stocks and bonds
    Fama, E. F.; French, K. R.
  • A five‐factor asset pricing model
    Fama, E. F.; French, K. R.
  • Global relation between financial distress and equity returns
    Gao, P.; Parsons, C. A.; Shen, J.
  • Default risk, shareholder advantage, and stock returns
    Garlappi, L.; Shu, T.; Yan, H.
  • Institutional investors and equity prices
    Gomper, P. A.; Metrick, A.
  • Book‐to‐market equity, distress risk, and stock returns
    Griffin, J. M.; Lemmon, M. L.
  • Analysts’ forecast bias and the overpricing of high credit risk stocks,
    Grinblatt, M.; Jostova, G.; Philipov, A.
  • Liquidity risk and expected stock returns in Korea: A new approach
    Jang, J.; Kang, J.; Lee, C.
  • Does it matter who pays for bond ratings? Historical evidence
    Jiang, J.; Stanford, M. H.; Xie, Y.
  • Credit ratings and equity returns
    Kim, T.; Shin, J.
  • On the pricing of corporate debt: The risk structure of interest rates
    Merton, R. C.
  • Hypothesis testing with efficient method of moments estimation
    Newey, W. K.; West, K. D.
  • Default risk in equity returns
    Vassalou, M.; Xing, Y.