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Why some Distressed Firms Have Low Expected Returns. ( Revised in September. 2007 )

Author

Listed:
  • Takao Kobayashi

    (Faculty of Economics, University of Tokyo)

  • Ryoichi Ikeda

    (Graduate School of Economics, University of Tokyo)

Abstract

In recent years, empirical researchers show that firms with higher credit risk have much smaller average stock returns. This finding is opposite to the risk-reward principle and is often attributed to mispricing and market anomalies. We investigate how credit risk and expected stock return are determined in a model with production, capital structure and aggregate uncertainty. We show that, contrary to the conventional wisdom, a firm with higher credit risk can have less risky stock than the one with lower credit risk.

Suggested Citation

  • Takao Kobayashi & Ryoichi Ikeda, 2007. "Why some Distressed Firms Have Low Expected Returns. ( Revised in September. 2007 )," CARF F-Series CARF-F-100, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    • Handle: RePEc:cfi:fseres:cf100
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    File URL: https://www.carf.e.u-tokyo.ac.jp/old/pdf/workingpaper/fseries/102.pdf
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    References listed on IDEAS

    as
    1. Leland, Hayne E, 1994. "Corporate Debt Value, Bond Covenants, and Optimal Capital Structure," Journal of Finance, American Finance Association, vol. 49(4), pages 1213-1252, September.
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