Is the Risk of Bankruptcy a Systematic Risk?
Posted: 3 Aug 1998
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: Suggested Citation