On the Conditional Risk and Performance of Financially Distressed Stocks

O'Doherty, Michael S., 2012, On the conditional risk and performance of financially distressed stocks, Management Science 58(8), 1502-1520.

34 Pages Posted: 3 Dec 2008 Last revised: 17 Jun 2014

See all articles by Michael S. O'Doherty

Michael S. O'Doherty

University of Missouri at Columbia - Department of Finance

Date Written: November 28, 2011

Abstract

Several recent articles find that stocks with high probabilities of bankruptcy or default earn anomalously low returns and negative unconditional CAPM alphas in the post-1980 period. I show that the conditional CAPM resolves the performance difference between high- and low-distress stocks. In particular, financially distressed stocks have relatively low exposure to market risk during bad economic times. I help to explain these findings through a theoretical model in which a levered firm's equity beta is negatively related to uncertainty about the unobserved value of its underlying assets.

Keywords: Conditional CAPM, asset-pricing anomalies, distress risk, default risk, parameter uncertainty, information risk

JEL Classification: G11, G12, G33

Suggested Citation

O'Doherty, Michael S., On the Conditional Risk and Performance of Financially Distressed Stocks (November 28, 2011). O'Doherty, Michael S., 2012, On the conditional risk and performance of financially distressed stocks, Management Science 58(8), 1502-1520.. Available at SSRN: https://ssrn.com/abstract=1309827 or http://dx.doi.org/10.2139/ssrn.1309827

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

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