Accounting Fundamentals and Systematic Risk: Corporate Failure over the Business Cycle

72 Pages Posted: 1 Oct 2014 Last revised: 14 Jun 2019

See all articles by Maria Ogneva

Maria Ogneva

University of Southern California - Marshall School of Business

Joseph D. Piotroski

Stanford Graduate School of Business

Anastasia A. Zakolyukina

University of Chicago - Booth School of Business

Date Written: June 12, 2019

Abstract

In this paper, we use accounting fundamentals to measure systematic risk of distress.
Our main testable prediction—that this risk increases with the probability of recessionary failure, P(R|F)—is based on a stylized model that guides our empirical analyses. We first apply the lasso method to select accounting fundamentals that can be combined into P(R|F) estimates. We then use the obtained estimates in asset-pricing tests. This approach successfully extracts systematic risk information from accounting data—we document a significant positive premium associated with P(R|F) estimates. The premium covaries with the news about the business cycle and aggregate failure rates. Additional tests underscore the importance of the “structure” imposed through recessionary-failure-probability estimation. The “agnostic” return predictor that relies only on past correlations between the same fundamental variables and returns exhibits markedly different properties.

Keywords: Systematic risk, distress, business cycle, expected returns, accounting fundamentals

JEL Classification: G12, G32, G33, M41

Suggested Citation

Ogneva, Maria and Piotroski, Joseph D. and Zakolyukina, Anastasia A., Accounting Fundamentals and Systematic Risk: Corporate Failure over the Business Cycle (June 12, 2019). Chicago Booth Research Paper No. 14-31; Stanford University Graduate School of Business Research Paper No. 14-37. Available at SSRN: https://ssrn.com/abstract=2503045 or http://dx.doi.org/10.2139/ssrn.2503045

Maria Ogneva (Contact Author)

University of Southern California - Marshall School of Business ( email )

701 Exposition Blvd
Los Angeles, CA 90089
United States

Joseph D. Piotroski

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

Anastasia A. Zakolyukina

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773.834.4838 (Phone)
773.926.0941 (Fax)

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