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
Date Written: November 28, 2011
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: Suggested Citation