When Is Distress Risk Priced? Evidence from Recessionary Failure Prediction

Maria Ogneva, Joseph D. Piotroski and Anastasia Zakolyukina
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Joseph D. Piotroski: Stanford University

Research Papers from Stanford University, Graduate School of Business

Abstract: This paper introduces a new measure of firm's exposure to systematic distress risk--the probability of a recession at the time of a firm's failure. For stocks in the top quintile of the probability of failure, a median hedge portfolio based on our measure generates a positive risk premium of 10%-12% per annum. Our results differ from the previously documented distress-risk anomaly--a negative correlation between the probability of failure and stock returns. We argue that the probability of failure does not capture systematic distress risk well because it does not differentiate between failures occurring in recessions and expansions.

JEL-codes: G11 G12 G32 G33 (search for similar items in EconPapers)
Date: 2015-05
New Economics Papers: this item is included in nep-cfn and nep-rmg
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Citations: View citations in EconPapers (1)

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Related works:
Working Paper: When Is Distress Risk Priced? Evidence from Recessionary Failure Prediction (2014)
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