Empirical test of momentum in financial distress firms: Evidence from Tehran Stock Exchange

Financial distress assumption in studies of Chan and Chen (1991) and Fama and French (1992) lead to pricing the risk of financial distress.Ignoring high risk of financial distress in asset pricing model, will lead to positive or negative risk premium on distressed stocks. Positive risk premium occurs when we overreact to the financial distress. Negative risk premium will happen in stock pricing when we under react to the financial distress.Under reaction to the financial bankruptcy, will lead distressed companies to have lower returns and momentum return will continue for next period.This research investigates investors’ behavior in response to the financial distress and momentum for healthy and bankruptcy companies while controlling risk factors: size, Book to market and market cap.The results indicate that investors underreact to distressed companies and momentum occurs in these companies.