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Is the Risk of Bankruptcy a Systematic Risk?

  • Ilia D. Dichev

    (University of Michigan Business School)

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    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, results demonstrate that bankruptcy risk is not rewarded by higher returns. Thus, a distress factor is unlikely to account for the size and book-to-market effects. Surprisingly, firms with high bankruptcy risk earn lower than average returns since 1980. A risk-based explanation cannot fully explain the anomalous evidence. Copyright The American Finance Association 1998.

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    Article provided by American Finance Association in its journal The Journal of Finance.

    Volume (Year): 53 (1998)
    Issue (Month): 3 (06)
    Pages: 1131-1147

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    Handle: RePEc:bla:jfinan:v:53:y:1998:i:3:p:1131-1147
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