Download or read book Credit Supply, Financial Distress and the Cross Section of Stock Returns written by Rui Zeng and published by . This book was released on 2014 with total page 50 pages. Available in PDF, EPUB and Kindle. Book excerpt: I present empirical evidence that the TED spread is a priced risk factor in the cross sectional stock returns. Stocks with higher exposure to the change in the TED spread require higher returns, and the return difference between the high sensitivity portfolio and the low sensitivity portfolio is a significant 6.6% annually. Individual stocks within the two extreme TED beta portfolios are more likely to be financially distressed, which is consistent with the documented hump-shaped relationship between expected return and default probability in Garlappi, Tao, and Yan (2008). The TED factor shows enhanced forecasting ability within non-crisis periods, and the size effect shows up only within the group of most distressed firms. This paper uncovers a systematic channel to reconcile the positive risk premium and negative risk premium found within the financially distressed stocks, and provide strong empirical evidence for the effect of credit supplying activities on corporate financing behaviors and stock performances.