Industry Distress Anomaly 

Joint with Hui Chen, Hongye Guo, Yan Ji

April 2025

We document a robust and significant industry financial distress anomaly. The industry distress anomaly remains significant after controlling for the firm distress anomaly, but it does not exist in placebo industries, constructed by reshuffling firms across real industries. To rationalize the industry distress anomaly, we propose an industry equilibrium model with endogenous strategic competition. Central to the model is the competition-distress feedback within industries, which amplifies the exposure of industries' profit margins and equity returns to aggregate discount-rate shocks. Industries with higher idiosyncratic left-tail risks are more distressed, yet are endogenously less exposed to aggregate shocks due to the weaker competition-distress feedback, implying lower expected equity returns.