Anginer, DenizYildizhan, Celim2012-03-192012-03-192010-05-01https://hdl.handle.net/10986/3804Although financial theory suggests a positive relationship between default risk and equity returns, recent empirical papers find anomalously low returns for stocks with high probabilities of default. The authors show that returns to distressed stocks previously documented are really an amalgamation of anomalies associated with three stock characteristics -- leverage, volatility and profitability. In this paper they use a market based measure -- corporate credit spreads -- to proxy for default risk. Unlike previously used measures that proxy for a firm's real-world probability of default, credit spreads proxy for a risk-adjusted (or a risk-neutral) probability of default and thereby explicitly account for the systematic component of distress risk. The authors show that credit spreads predict corporate defaults better than previously used measures, such as, bond ratings, accounting variables and structural model parameters. They do not find default risk to be significantly priced in the cross-section of equity returns. There is also no evidence of firms with high default risk delivering anomalously low returns.CC BY 3.0 IGOABSOLUTE PRIORITY RULEACCOUNTINGASSET PRICESASSET PRICING TESTSASSET PRICING THEORIESASSET RETURNSASSET VALUEASSET VALUESBANKRUPTBANKRUPTCIESBANKRUPTCYBANKRUPTCY FILINGSBANKRUPTCY REFORMBASIS POINTSBENCHMARKBENCHMARKSBIDBOND DATABOND ISSUEBOND MARKETBOND MATURITYBOND RATINGSBOND SPREADBOND SPREADSBOND YIELDBOND YIELDSBOOK DEBTBOOK RATIOBOOK-TO-MARKETBOOK-TO-MARKET EQUITYBPSCALL OPTIONCAPITAL ASSETCAPITAL ASSET PRICINGCAPITAL ASSET PRICING MODELCAPITAL MARKETCAPITAL STRUCTURECDSCHARACTERISTIC PORTFOLIOSCHECKSCONSUMER PRICE INDEXCONVERTIBLE BONDSCORPORATE BANKRUPTCYCORPORATE BONDCORPORATE BOND MARKETSCORPORATE BOND RATINGSCORPORATE BONDSCORPORATE DEBTCORPORATE DEFAULTCORPORATE DEFAULTSCORPORATE YIELDCORPORATE-TREASURY YIELDCOUPONCREDIT DEFAULTCREDIT DEFAULT SWAPCREDIT DEFAULT SWAPSCREDIT DERIVATIVESCREDIT QUALITYCREDIT RATINGCREDIT RATINGSCREDIT RISKCREDIT SPREADCREDIT SPREADSDEBTDEBT SECURITIESDEFAULT INFORMATIONDEFAULT LOSSESDEFAULT PROBABILITIESDEFAULT PROBABILITYDEFAULT RATESDEFAULT RISKDERIVATIVEDISTRESSED FIRMSDIVIDENDDIVIDEND RATEDIVIDENDSDUMMY VARIABLEDUMMY VARIABLESDYNAMIC PANELEARNINGS BEFORE INTERESTECONOMIC FLUCTUATIONSEFFICIENT MARKETEQUITIESEQUITY MARKETEQUITY MARKET VALUEEQUITY PORTFOLIOEQUITY PREMIUMEQUITY RETURNEQUITY RETURNSEQUITY VALUEEQUITY VOLATILITYEVENT OF DEFAULTEXPECTED RETURNSFACE VALUEFACE VALUE OF DEBTFEDERAL RESERVEFINANCIAL DISTRESSFINANCIAL MARKETSFINANCIAL OBLIGATIONSFINANCIAL STUDIESFIXED INCOMEFIXED INCOME SECURITIESFLOATING INTEREST RATESFLOATING RATEFLOATING RATE DEBTFORECASTSGROWTH STOCKSHAZARD RATEHUMAN CAPITALIDIOSYNCRATIC RISKILLIQUIDITYINDIVIDUAL STOCKINSURANCEINTEREST-RATEINTERNATIONAL BANKLEVERAGELEVERAGE INCREASESLIQUIDITYLIQUIDITY POSITIONLIQUIDITY RISKLITERATURE ON BANKRUPTCYLOSS AVERSIONLOSS RATELOSS RATESMARKET CAPITALIZATIONMARKET EFFICIENCYMARKET EQUILIBRIUMMARKET EQUITYMARKET LIQUIDITYMARKET VALUEMARKET VALUE OF ASSETSMARKET VALUE OF EQUITYMARKET VALUESMATURITIESMATURITYMICROSTRUCTUREMODELS OF BANKRUPTCYMOMENTUM FACTORMUTUAL FUNDMUTUAL FUND MANAGERSMUTUAL FUND PERFORMANCEMUTUAL FUND PORTFOLIOMUTUAL FUND PORTFOLIO HOLDINGSPOLITICAL ECONOMYPOOR PERFORMERSPORTFOLIOPORTFOLIO HOLDINGSPORTFOLIO RETURNPORTFOLIO RETURNSPREVIOUS STUDIESPRICE PER SHAREPRIVATE EQUITYPROBABILITIES OF DEFAULTPROBABILITY OF BANKRUPTCYPROBABILITY OF DEFAULTPROFITABILITYRATING AGENCIESRAW RETURNRAW RETURNSRETURNRETURN DIFFERENCESRETURNS ON STOCKSRISK ASSETSRISK FACTORRISK FACTORSRISK MEASURERISK MEASURESRISK OF BANKRUPTCYRISK OF DEFAULTRISK PREMIUMRISK-FREE RATERISK-NEUTRAL PROBABILITIESRISKY INVESTMENTSROBUSTNESS CHECKSS&PSECURITY RETURNSSHAREHOLDERSTATISTICAL ANALYSESSTOCK CHARACTERISTICSTOCK CHARACTERISTICSSTOCK MARKETSTOCK MARKET EFFICIENCYSTOCK PORTFOLIOSSTOCK RETURNSSTOCK VALUATIONSTOCKSSURVIVORSHIP BIASSWAPSWAP MARKETSYSTEMATIC RISKTRADINGTRADING COSTSTREASURYTREASURY BILLTREASURY BILL RATETREASURY RATETREASURY RATESTREASURY YIELD SPREADTURNOVERVALUATIONVALUE OF ASSETSVALUE STOCKSVOLATILITYWARRANTSWEALTHWORKING CAPITALYIELD SPREADYIELD SPREADSWorld Bank10.1596/1813-9450-5319