Financial Distress and Equity Returns: A Leverage-Augmented Three-Factor Model

Research in International Business and Finance 46 (2018) 1-15.

29 Pages Posted: 25 Jul 2017 Last revised: 4 Oct 2018

See all articles by Sabri Boubaker

Sabri Boubaker

South Champagne Business School; University Paris-Est Créteil (UPEC) - Institut de Recherche en Gestion

Taher Hamza

Institut Supérieur de Gestion de Sousse; University of Sousse

Javier Vidal-García

Harvard University; Complutense University Madrid

Date Written: September 9, 2016

Abstract

Our study examines whether financial distress risk is systematic risk using twelve portfolios sorted by size, book-to-market, and leverage and a portfolio of distressed firms covering an 18-year period. It also tests the explanatory power of the risk factors that best capture default risk. The empirical findings show that: (i) equity portfolio investment requires systematically both size and value premiums and that SMB and HML capture additional risk missed by the market portfolio; (ii) the leverage risk premium is positive for highly leveraged firms; and (iii) the risk premium for the relative distress factor is significant only for the distressed firm portfolio. Overall, our results have practical implications for portfolio managers since they advocate a leverage-augmented three-factor model to accurately price assets and to implement efficient portfolio strategies.

Keywords: Financial Distress; Equity Returns; Fama-French Three-Factor Model

JEL Classification: G12; G33

Suggested Citation

Boubaker, Sabri and Hamza, Taher and Vidal-García, Javier, Financial Distress and Equity Returns: A Leverage-Augmented Three-Factor Model (September 9, 2016). Research in International Business and Finance 46 (2018) 1-15.. Available at SSRN: https://ssrn.com/abstract=3006827

Sabri Boubaker

South Champagne Business School ( email )

217 avenue Pierre Brossolette BP 710
Troyes, Troyes 10002
France
+33 3 25 71 22 31 (Phone)
+33 3 25 49 22 17 (Fax)

HOME PAGE: http://www.get-formation.fr/chercheurs/sabri-boubaker

University Paris-Est Créteil (UPEC) - Institut de Recherche en Gestion ( email )

61 Avenue du General de Gaulle
94010 Creteil
France

HOME PAGE: http://www.irg.u-pec.fr/enseignant.php?num=58

Taher Hamza

Institut Supérieur de Gestion de Sousse ( email )

Sousse, Tunis 2000
Tunisia

University of Sousse ( email )

rue Abdelaziz el Behi
Sousse, Sousse 4000
Tunisia

Javier Vidal-García (Contact Author)

Harvard University ( email )

1875 Cambridge Street
Cambridge, MA 02138
United States

Complutense University Madrid ( email )

School of Business Administration
Somosaguas Campus
Madrid, Madrid 28223
Spain

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