Is the Risk of Bankruptcy a Systematic Risk?

Is the Risk of Bankruptcy a Systematic Risk? ILIA D. DICHEV* ABSTRACT several(prenominal) studies suggest that a unshakable affliction gamble element could be behind the size of it and the book-to-market effects. A natural proxy for square distress is unsuccessful person risk. If bankruptcy risk is systematic, one would expect a positive association between bankruptcy risk and subsequent established returns. However, results demonstrate that bankruptcy risk is not rewarded by luxuriouslyer returns. Thus, a distress reckon is unlikely to account for the size and book-to-market effects. Surprisingly, quicks with high bankruptcy risk earn lower than average returns since 1980. A risk-based explanation cannot richly explain the anomalous evidence. SEVERAL STUDIES SUGGEST that the effects of firm size and book-to-market, probably the two most powerful predictors of neckcloth returns, could be related to some sort of a firm distress risk factor. For example, Chan and Chen ~1991! find that marginal firms, or inefficient firms with high leverage and cash flow problems, seem to drive the small firm effect. Fama and French ~1992! conjecture that the book-to-market effect might be due to the risk of distress. Chan, Chen, and Hsieh ~1985!

show that much of the size effect is explained by a oversight factor, computed as the difference between high-grade and low-grade bail returns. Fama and French ~1993! and Chen, Roll, and Ross ~1986! find that a similarly defined default factor is significant in explaining stock returns. This study investigates the splendour of the firm distress risk factor and its relation to size and book-to-market effects. Probability of bankruptcy is a natural proxy for firm distress, and in that location is a well-developed literature on bankruptcy prediction that provides powerful measures of ex ante bankruptcy risk ~see Altman ~1993! for a review!. record that bankruptcy risk is systematic would support a distress factor explanation for the size and the book-to-market effects. Existing... If you want to get a broad essay, order it on our website: Orderessay

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