Is the Risk of Bankruptcy a Systematic Risk?
Author:
- 1 June 1998
- journal article
- Published by Wiley in The Journal of Finance
- Vol. 53 (3) , 1131-1147
Abstract
Several studies suggest that a firm distress risk factor could be behind the size and the book‐to‐market effects. A natural proxy for firm distress is bankruptcy risk. If bankruptcy risk is systematic, one would expect a positive association between bankruptcy risk and subsequent realized returns. However, results demonstrate that bankruptcy risk is not rewarded by higher returns. Thus, a distress factor is unlikely to account for the size and book‐to‐market effects. Surprisingly, firms with high bankruptcy risk earn lower than average returns since 1980. A risk‐based explanation cannot fully explain the anomalous evidence.Keywords
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