Distress Risk Premia in Stock and Bond Returns

46 Pages Posted: 1 Dec 2006 Last revised: 20 Jul 2011

Andrew (Jianzhong) Zhang

University of Nevada, Las Vegas - Department of Finance

Date Written: June 5, 2011

Abstract

Prior studies find that shareholders’ strategic actions over debtholders are significant for stock prices but not for bond prices. I find that for firms with private and public debt, strategic default has no significant effect on distress risk premia in expected stock or bond returns, suggesting that the dispersion of bondholders greatly weakens the shareholder advantage effect. The shareholder advantage effect on stock prices is only significant for firms with only private debt and, to some degree, affected by the dispersion of stockholders and complexity in capital structure. Overall, renegotiation friction helps explain the cross-sectional implications of strategic default for stock and bond prices.

Keywords: distress risk premium, bond risk premium, strategic default

JEL Classification: G12, G13, G33

Suggested Citation

Zhang, Andrew (Jianzhong), Distress Risk Premia in Stock and Bond Returns (June 5, 2011). Journal of Banking and Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=947844 or http://dx.doi.org/10.2139/ssrn.947844

Andrew (Jianzhong) Zhang (Contact Author)

University of Nevada, Las Vegas - Department of Finance ( email )

4505 S. Maryland Parkway
Box 456008
Las Vegas, NV 89154-6008
United States

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