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When Is Distress Risk Priced? Evidence from Recessionary Failure Prediction

Author

Listed:
  • Ogneva, Maria

    (University of Southern CA)

  • Piotroski, Joseph D.

    (Stanford University)

  • Zakolyukina, Anastasia A.

    (University of Chicago)

Abstract

This paper introduces a new measure of firm's exposure to systematic distress risk--the probability of a recession at the time of a firm's failure. For stocks in the top quintile of the probability of failure, a median hedge portfolio based on our measure generates a positive risk premium of 10%-12% per annum. Our results differ from the previously documented distress-risk anomaly--a negative correlation between the probability of failure and stock returns. We argue that the probability of failure does not capture systematic distress risk well because it does not differentiate between failures occurring in recessions and expansions.

Suggested Citation

  • Ogneva, Maria & Piotroski, Joseph D. & Zakolyukina, Anastasia A., 2015. "When Is Distress Risk Priced? Evidence from Recessionary Failure Prediction," Research Papers 3333, Stanford University, Graduate School of Business.
    • Handle: RePEc:ecl:stabus:3333
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    File URL: http://www.gsb.stanford.edu/gsb-cmis/gsb-cmis-download-auth/378276
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    Cited by:

    1. Jens Hilscher & Mungo Wilson, 2017. "Credit Ratings and Credit Risk: Is One Measure Enough?," Management Science, INFORMS, vol. 63(10), pages 3414-3437, October.

    More about this item

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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