The effect of corporate liquidity and investor protection on the behaviour of distressed equity in Europe

University essay from Uppsala universitet/Företagsekonomiska institutionen

Abstract: This study examines the effect of corporate liquidity and investor protection on the relation between financial distress and equity returns using a European sample over the 2002-2016 period. The results show that returns are hump-shaped and decreasing for increasing default risk. This can be rationalized by corporate liquidity indicating that higher cash holdings decrease liquidity risk. Moreover, firms in countries with high investor protection exhibit a more severe decrease of returns when default risk increases relative to firms in countries with low investor protection. This is because of the legal system that allows investors to renegotiate upon distress and to more accurately price equities.

  AT THIS PAGE YOU CAN DOWNLOAD THE WHOLE ESSAY. (follow the link to the next page)