Is Default Risk Negatively Related to Stock Returns?
Georgia Institute of Technology - College of Management
Amiyatosh K. Purnanandam
University of Michigan - Stephen M. Ross School of Business
The Review of Financial Studies, Vol. 23, Issue 6, pp. 2523-2559, 2010
We find a positive cross-sectional relationship between expected stock returns and default risk, contrary to the negative relationship estimated by prior studies. Whereas prior studies use noisy ex post realized returns to estimate expected returns, we use ex ante estimates based on the implied cost of capital. The results suggest that investors expected higher returns for bearing default risk, but they were negatively surprised by lower-than-expected returns on high default risk stocks in the 1980s. We also extend the sample compared with prior studies and find that the evidence based on realized returns is considerably weaker in the 1952-1980 period.
Keywords: G11, G12, G13, G14, G33Accepted Paper Series
Date posted: May 17, 2010
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo6 in 0.391 seconds