Stocks with increases in idiosyncratic risk tend to earn low subsequent returns for a few months. However, high idiosyncratic risk stocks eventually earn persistently high returns. These results are consistent with positively priced idiosyncratic risk and temporary underreaction to idiosyncratic...

We examine the puzzling negative relation between financial distress risk and the cross-section of expected returns. We find that the negative relation is most pronounced for up to six months after portfolio formation but after that, high distress stocks eventually earn persistently high...