In Search of Distress Risk

47 Pages Posted: 28 Jul 2005  

John Y. Campbell

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Jens Hilscher

University of California, Davis

Jan Szilagyi

Duquesne Capital Management LLC

Multiple version iconThere are 3 versions of this paper

Abstract

This paper explores the determinants of corporate failure and the pricing of financially distressed stocks using US data over the period 1963 to 2003. Firms with higher leverage, lower profitability, lower market capitalization, lower past stock returns, more volatile past stock returns, lower cash holdings, higher market-book ratios, and lower prices per share are more likely to file for bankruptcy, be delisted, or receive a D rating. When predicting failure at longer horizons, the most persistent firm characteristics, market capitalization, the market-book ratio, and equity volatility become relatively more significant. Our model captures much of the time variation in the aggregate failure rate. Since 1981, financially distressed stocks have delivered anomalously low returns. They have lower returns but much higher standard deviations, market betas, and loadings on value and small-cap risk factors than stocks with a low risk of failure. These patterns hold in all size quintiles but are particularly strong in smaller stocks. They are inconsistent with the conjecture that the value and size effects are compensation for the risk of financial distress.

Suggested Citation

Campbell, John Y. and Hilscher, Jens and Szilagyi, Jan, In Search of Distress Risk. Harvard Institute of Economic Research Discussion Paper No. 2081. Available at SSRN: https://ssrn.com/abstract=770805 or http://dx.doi.org/10.2139/ssrn.770805

John Y. Campbell (Contact Author)

Harvard University - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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Jens Hilscher

University of California, Davis ( email )

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Jan Szilagyi

Duquesne Capital Management LLC ( email )

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New York, NY 10024
United States

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