In search of distress risk
By: John Y. Campbell, Jens Hilscher, Jan Szilagyi.
Contributors: Hilscher, Jens.; Szilagyi, Jan.; National Bureau of Economic Research.
Series: NBER working paper series -- no. 12362.; Working paper series (National Bureau of Economic Research) -- working paper no. 12362.
Publisher: National Bureau of Economic Research
Published: 2006
Place of publication: Cambridge, Mass
Language: eng
Number of pages: 36
Subjects: Stocks -- Prices -- United States -- Mathematical models; Business failures -- United States; Corporations -- United States -- Finance
Description: "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"--National Bureau of Economic Research web site.
Notes: "July 2006."

Includes bibliographical references (p. 31-36).

Also available in PDF from the NBER world wide web site (www.nber.org).