Reverse Robin Hood. A Swedish Assessment of the Distress Puzzle

Abstract: This research adopts some of the most well-known models to predict financial distress to be able to investigate whether firms with higher probability to default and thereby incorporating more risk do provide investors with a higher return in the Swedish market. We create portfolios sorted on the predicted probability of the financial distress and subsequently perform a portfolio analysis to investigate the risk return relationship. Our results show that portfolios consisting of the more financially distressed firms consistently underperform the more stable firms, which results in a financial distress puzzle within the Swedish market.