Why some Distressed Firms Have Low Expected Returns. ( Revised in September. 2007 )

Takao Kobayashi and Ryoichi Ikeda
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Takao Kobayashi: Faculty of Economics, University of Tokyo
Ryoichi Ikeda: Graduate School of Economics, University of Tokyo

No CARF-F-100, CARF F-Series from Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo

Abstract: In recent years, empirical researchers show that firms with higher credit risk have much smaller average stock returns. This finding is opposite to the risk-reward principle and is often attributed to mispricing and market anomalies. We investigate how credit risk and expected stock return are determined in a model with production, capital structure and aggregate uncertainty. We show that, contrary to the conventional wisdom, a firm with higher credit risk can have less risky stock than the one with lower credit risk.

Pages: 21 pages
Date: 2007-07
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Persistent link: https://EconPapers.repec.org/RePEc:cfi:fseres:cf100

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