Revisiting the Relation between Distress Risk and Stock Returns

35 Pages Posted: 31 Jul 2008 Last revised: 1 Feb 2010

See all articles by Michael S. O'Doherty

Michael S. O'Doherty

University of Missouri at Columbia - Department of Finance

Date Written: January 19, 2010

Abstract

Several prior studies use reduced-form models of bankruptcy or default risk to proxy for corporate distress and find evidence of a significant negative relation between distress risk and average returns. This paper introduces a substantially broader measure of firm failure risk, the probability a firm is delisted from a major U.S. stock exchange for performance reasons, and revisits the pricing of distressed stocks. In contrast to the prior literature, I find distressed stocks earn higher average returns than those with a low probability of failure. Moreover, distress risk is significantly priced in the cross section. While the size and value effects remain robust to controlling for failure risk, I find evidence that SMB and HML contain some distress-related information.

Keywords: Distress risk, performance delisting, hazard model, value effect, size effect, financial distress

JEL Classification: G11, G12, G33

Suggested Citation

O'Doherty, Michael S., Revisiting the Relation between Distress Risk and Stock Returns (January 19, 2010). Available at SSRN: https://ssrn.com/abstract=1189805 or http://dx.doi.org/10.2139/ssrn.1189805

Michael S. O'Doherty (Contact Author)

University of Missouri at Columbia - Department of Finance ( email )

Robert J. Trulaske, Sr. College of Business
401 Cornell Hall
Columbia, MO 65211
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
447
Abstract Views
1,835
rank
67,271
PlumX Metrics