Campbell, John Y, Jens Hilscher and Jan Szilagyi, 2005.

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In Search of Distress RiskJohn Y. Campbell, Jens Hilscher, and Jan Szilagyi 1First draft: October 2004This version: June 27, 20051 Corresponding author: John Y. Campbell, Department of Economics, Littauer Center213, Harvard University, Cambridge MA 02138, USA, and NBER. Tel 617-496-6448, emailjohn_campbell@harvard.edu. This material is based upon work supported by the National ScienceFoundation under Grant No. 0214061 to Campbell. We would like to thank Robert Jarrowand Don van Deventer of Kamakura Risk Information Services (KRIS) for providing us with dataon corporate bankruptcies and failures, and Stuart Gilson, John Griffin, Scott Richardson, Ulf vonKalckreuth, and seminar participants at Humboldt Universität zu Berlin, HEC Paris, the Universityof Texas, the Wharton School, and the Deutsche Bundesbank 2005 Spring Conference for helpfuldiscussion.
AbstractThis paper explores the determinants of corporate failure and the pricing of financiallydistressed stocks using US data over the period 1963 to 2003. Firmswith higher leverage, lower profitability, lower market capitalization, lower past stockreturns, more volatile past stock returns, lower cash holdings, higher market-bookratios, and lower prices per share are more likely to file for bankruptcy, be delisted,or receive a D rating. When predicting failure at longer horizons, the most persistentfirm characteristics, market capitalization, the market-book ratio, and equityvolatility become relatively more significant. Our model captures much of the timevariation in the aggregate failure rate. Since 1981, financially distressed stocks havedelivered anomalously low returns. They have lower returns but much higher standarddeviations, market betas, and loadings on value and small-cap risk factors thanstocks with a low risk of failure. These patterns hold in all size quintiles but areparticularly strong in smaller stocks. They are inconsistent with the conjecture thatthevalueandsizeeffects are compensation for the risk of financial distress.
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Campbell, John Y, Jens Hilscher and Jan Szilagyi, 2005.

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