In Search of Distress Risk

54 Pages Posted: 20 Jul 2006 Last revised: 13 Oct 2022

See all articles by John Y. Campbell

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

Date Written: July 2006

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 persistentfirm 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 (July 2006). NBER Working Paper No. w12362, Available at SSRN: https://ssrn.com/abstract=917567

John Y. Campbell (Contact Author)

Harvard University - Department of Economics ( email )

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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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