Distress Risk Premia in Stock and Bond Returns

Zhang, Jianzhong

doi:10.2139/ssrn.947844

SSRN Journal

2011

DOI: 10.2139/ssrn.947844

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Distress Risk Premia in Stock and Bond Returns

Jianzhong Zhang

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Cited by 4 publications

(3 citation statements)

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“…O'Doherty (2009) argues that the effect of financial distress on stock returns is consistent with the conditional CAPM. In addition, Zhang (2010) shows that the effect of shareholder recovery is particularly strong among firms with private debt, which is more conducive to private workouts upon financial distress.…”

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confidence: 99%

Financial Distress and the Cross‐section of Equity Returns

Garlappi

Yan

2011

The Journal of Finance

277

154

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We explicitly consider financial leverage in a simple equity valuation model and study the cross-sectional implications of potential shareholder recovery upon resolution of financial distress. Our model is capable of simultaneously explaining lower returns for financially distressed stocks, stronger book-to-market effects for firms with high default likelihood, and the concentration of momentum profits among low credit quality firms. The model further predicts (i) a hump-shaped relationship between value premium and default probability, and (ii) stronger momentum profits for nearly distressed firms with significant prospects for shareholder recovery. Our empirical analysis strongly confirms these novel predictions.

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confidence: 99%

Financial Distress and the Cross‐section of Equity Returns

Garlappi

Yan

2011

The Journal of Finance

277

154

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confidence: 99%

Financial Distress and the Cross Section of Equity Returns

Garlappi

Yan

2010

SSRN Journal

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“…Zhang (2007) presents evidence that the e¤ect of shareholder advantage on the negative relation between stock returns and distress risk is negligible for …rms with bonds outstanding.…”

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confidence: 99%

Default Risk, Equity Returns and the Value of Limited Liability Protection

Rolph

2009

SSRN Journal

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This paper examines the impact of limited liability on equity prices and expected returns. I develop an equity pricing model that links investors'preference for downside loss protection to the limited liability feature of equity. The hedging value of limited liability increases with the systematic risk of …rms'assets. For su¢ ciently high levels of systematic risk, expected equity returns decline as leverage increases. Empirically, I …nd a strong negative relation between average returns and …nancial leverage for …rms with high equity covariance risk. These …ndings suggest that the limited liability feature of equity plays an important role in driving the negative relation between average returns and default risk.

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Distress Risk Premia in Stock and Bond Returns

Cited by 4 publications

References 71 publications

Financial Distress and the Cross‐section of Equity Returns

Financial Distress and the Cross‐section of Equity Returns

Financial Distress and the Cross Section of Equity Returns

Default Risk, Equity Returns and the Value of Limited Liability Protection

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