Distress Risk Premia in Stock and Bond Returns

Abstract:     
Prior studies find that shareholders’ strategic actions over debtholders are significant for stock prices but not for bond prices. I find that for firms with private and public debt, strategic default has no significant effect on distress risk premia in expected stock or bond returns, suggesting that the dispersion of bondholders greatly weakens the shareholder advantage effect. The shareholder advantage effect on stock prices is only significant for firms with only private debt and, to some degree, affected by the dispersion of stockholders and complexity in capital structure. Overall, renegotiation friction helps explain the cross-sectional implications of strategic default for stock and bond prices.

Number of Pages in PDF File: 46

Keywords: distress risk premium, bond risk premium, strategic default

JEL Classification: G12, G13, G33

working papers series