On the Conditional Risk and Performance of Financially Distressed Stocks

Michael S. O'Doherty ()
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Michael S. O'Doherty: Trulaske College of Business, University of Missouri, Columbia, Missouri 65211

Management Science, 2012, vol. 58, issue 8, 1502-1520

Abstract: Several recent articles find that stocks with high probabilities of bankruptcy or default earn anomalously low returns and negative unconditional capital asset pricing model (CAPM) alphas in the post-1980 period. I show that the conditional CAPM resolves the performance difference between high- and low-distress stocks. In particular, financially distressed stocks have relatively low exposure to market risk during bad economic times. I help to explain these findings through a theoretical model in which a levered firm's equity beta is negatively related to uncertainty about the unobserved value of its underlying assets. This paper was accepted by Wei Xiong, finance.

Keywords: conditional CAPM; asset-pricing anomalies; distress risk; default risk; information risk (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:58:y:2012:i:8:p:1502-1520

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