A relation of the distress risk and equity returns puzzle- Empirical evidence from the Tehran Stock Exchange

Document Type : Research Paper


1 payam noor university

2 Shahid Beheshti University


In this research, we test for the systematic relationship between distress risk and equity returns based on the two measures of financial distress risk, Altman's Z score and the other Ohlson' O score. Also, we test the role of beta, B/M and size factors in explaining the equity returns by the three factor model of Fama and French (1992). For this reason, we use portfolio formation method like Outecheva (2007) and Garlappi and Yan (2011). We use annual data of TSE from 1382 to 1390. Findings show that returns are negatively related to financial distress. On the other hand, BM and Size effects are independent from financial distress risk. So it seems financial distress risk is unsystematic. Also findings show that Small stocks become highly financially distressed more often than companies of bigger size.


Main Subjects

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