Size, Overreaction, and Book-to-Market Effects as Default Premia

Posted: 18 Dec 1996

See all articles by Tyler Shumway

Tyler Shumway

University of Michigan at Ann Arbor, The Stephen M. Ross School of Business

Date Written: November 1996

Abstract

This study explores the hypothesis that firm size, past returns, and book-to-market equity predict stock returns because of a premium for default or distress risk. Small size, low past returns, and high leverage all forecast default. However, book-to-market is only weakly correlated with default risk. The firm-specific probability of default is both statistically and economically significant in returns regressions. Furthermore, both size and past returns lose their ability to forecast returns when combined with default risk in regressions. The size and overreaction effects may be manifestations of a default premium, but the book-to-market effect cannot be described as a distress effect.

JEL Classification: G12

Suggested Citation

Shumway, Tyler, Size, Overreaction, and Book-to-Market Effects as Default Premia (November 1996). Available at SSRN: https://ssrn.com/abstract=7996

Tyler Shumway (Contact Author)

University of Michigan at Ann Arbor, The Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States
734-763-4129 (Phone)
734-936-0274 (Fax)

HOME PAGE: http://www.umich.edu/~shumway

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