Credit Risk and Anomalies in Pakistan’s Stock Market

다국어 초록 (Multilingual Abstract)

This paper investigates the relation between credit risk and stock return for publicly traded firms in the Pakistan Stock Exchange (PSX) over the period 2000–2017. Using credit ratings as a proxy for credit risk, we find that the credit risk–stock return relation is negative in Pakistan, as low-rated stocks (i.e., those with high credit risk) earn lower returns than high-rated stocks (i.e., those with low credit risk). This negative relation is robust to alternative measures of credit risk (e.g., Altman’s Z-score and the distance-to-default) and is also maintained even after controlling for size, momentum, and liquidity effects. Our study provides evidence of the default-risk anomaly in a frontier market that lacks adequate information infrastructure and faces high levels of political and economic uncertainty.

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