Industry Distress Anomaly

We document a robust industry-level distress anomaly in which more distressed industries earn significantly lower expected equity returns.The anomaly is distinct from the firm-level distress anomaly (Campbell, Hilscher and Szilagyi, 2008).It remains significant after controlling for firm-level distress but disappears in placebo industries formed by randomly reshuffling firms across actual industries.Both theoretically and empirically, we show that competition-distress feedback amplifies the exposure of industry profit margins and equity returns to discount-rate shocks.Industries with greater idiosyncratic left-tail risk are more distressed but exhibit weaker competition-distress feedback.This effect reduces their exposure to discount-rate shocks and thus lowers their expected equity returns.