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Is the Risk of Bankruptcy a Systematic Risk?

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  • Ilia D. Dichev

    (University of Michigan Business School)

Abstract

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.

Suggested Citation

  • Ilia D. Dichev, 1998. "Is the Risk of Bankruptcy a Systematic Risk?," Journal of Finance, American Finance Association, vol. 53(3), pages 1131-1147, June.
  • Handle: RePEc:bla:jfinan:v:53:y:1998:i:3:p:1131-1147
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