Is the Risk of Bankruptcy a Systematic Risk?

Posted: 19 Aug 1996

See all articles by Ilia D. Dichev

Ilia D. Dichev

Emory University - Department of Accounting

Multiple version iconThere are 2 versions of this paper

Date Written: July 1996


This study investigates whether the risk of bankruptcy is a systematic risk. Measures of bankruptcy risk are derived from Altman's (1968) and Ohlson's (1980) models of bankruptcy prediction. Systematic risk is proxied by subsequent realized returns. If the risk of bankruptcy is at least partly systematic, one would expect a positive association between present bankruptcy risk and subsequent realized returns. However, the results demonstrate that bankruptcy risk is not rewarded by higher returns for NYSE, AMEX, and NASDAQ firms. In fact, more insolvent firms earn significantly lower than average returns in the NASDAQ subsample. Additional tests suggest that a risk-based explanation is unlikely to fully account for the anomalous NASDAQ result. However, there is evidence that the security prices of the most insolvent NASDAQ firms do not fully reflect the negative implications of available information.

JEL Classification: G33, G12, G15

Suggested Citation

Dichev, Ilia D., Is the Risk of Bankruptcy a Systematic Risk? (July 1996). Available at SSRN:

Ilia D. Dichev (Contact Author)

Emory University - Department of Accounting ( email )

1300 Clifton Road
Atlanta, GA 30322-2722
United States

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