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Public abstract
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.