Is the Risk of Bankruptcy a Systematic Risk?

Posted: 3 Aug 1998  

Ilia D. Dichev

Emory University - Department of Accounting

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Abstract

Several studies suggest that a firm distress risk factor could be behind the size and the book-to-market effects. A natural proxy for firm distress is bankruptcy risk. If bankruptcy risk is systematic, one would expect a positive association between bankruptcy risk and subsequent realized returns. However, the results demonstrate that bankruptcy risk is not rewarded by higher returns. Thus, a distress factor is unlikely to account for the size and the book-to-market effects. Surprisingly, firms with high bankruptcy risk earn lower than average returns since 1980. Additional results suggest that a risk-based explanation cannot fully explain the anomalous post-1980 evidence.

JEL Classification: G12, G33

Suggested Citation

Dichev, Ilia D., Is the Risk of Bankruptcy a Systematic Risk?. Journal of Finance, Vol 53, June 1998. Available at SSRN: https://ssrn.com/abstract=99868

Ilia D. Dichev (Contact Author)

Emory University - Department of Accounting ( email )

1300 Clifton Road
Atlanta, GA 30322-2722
United States

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