Is the Risk of Bankruptcy a Systematic Risk?
ILIA D. DICHEV*
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.
SEVERAL STUDIES SUGGEST that the effects of firm size and book-to-market,
probably the two most powerful predictors of stock returns, could be related
to some sort of a firm distress risk factor. For example, Chan and Chen
~1991! find that "marginal" firms, or inefficient firms......
Join Now or Login to view the rest of this paper.
Approximate Word Count: 1488
Approximate Pages: 6 (260 words per double-spaced page) |