Economics at your fingertips  

Is Default Risk Negatively Related to Stock Returns?

Sudheer Chava and Amiyatosh Purnanandam

Review of Financial Studies, 2010, vol. 23, issue 6, 2523-2559

Abstract: We find a positive cross-sectional relationship between expected stock returns and default risk, contrary to the negative relationship estimated by prior studies. Whereas prior studies use noisy ex post realized returns to estimate expected returns, we use ex ante estimates based on the implied cost of capital. The results suggest that investors expected higher returns for bearing default risk, but they were negatively surprised by lower-than-expected returns on high default risk stocks in the 1980s. We also extend the sample compared with prior studies and find that the evidence based on realized returns is considerably weaker in the 1952--1980 period. The Author 2009. Published by Oxford University Press. All rights reserved. For permissions, please e-mail:, Oxford University Press.

Date: 2010
References: Add references at CitEc
Citations: View citations in EconPapers (77) Track citations by RSS feed

Downloads: (external link) (application/pdf)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

Ordering information: This journal article can be ordered from

Access Statistics for this article

Review of Financial Studies is currently edited by Maureen O'Hara

More articles in Review of Financial Studies from Society for Financial Studies Oxford University Press, Journals Department, 2001 Evans Road, Cary, NC 27513 USA.. Contact information at EDIRC.
Bibliographic data for series maintained by Oxford University Press ().

Page updated 2021-01-20
Handle: RePEc:oup:rfinst:v:23:y:2010:i:6:p:2523-2559