In Search of Distress Risk

By John Y. Campbell, Jens Hilscher, J. Szilágyi. Social Science Research Network, 2008

2,295 citations recorded by the source corpus.

This paper explores the determinants of corporate failure and the pricing of financially distressed stocks using US data over the period 1963 to 2003. Firms with higher leverage, lower profitability, lower market capitalization, lower past stock returns, more volatile past stock returns, lower cash holdings, higher market-book ratios, and lower prices per share are more likely to file for bankruptcy, be delisted, or receive a D rating. When predicting failure at longer horizons, the most persistent firm characteristics, market capitalization, the market-book ratio, and equity volatility become relatively more significant. Our model captures much of the time variation in the aggregate failure rate. Since 1981, financially distressed stocks have delivered anomalously low returns. They have lower returns but much higher standard deviations, market betas, and loadings on value and small-cap risk factors than stocks with a low risk of failure. These patterns hold in all size quintiles but are particularly strong in smaller stocks. They are inconsistent with the conjecture that the value and size effects are compensation for the risk of financial distress.

Subfields: Accounting, Finance

View Paper: https://www.semanticscholar.org/paper/3e4c63d1ab2ed14bf47dd3f834e6d021eb094191

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Citations in the corpus

Predicting Distress in European Banks (2014, background): “…and market price-based indicators contain useful predictive information not contained in the CAMELS indicators (see e.g. Flannery (1998), González-Hermosillo (1999), Jagtiani and Lemieux (2001), Curry et al. (2007), Bharath and Shumway (2008), Campbell et al. (2008) and Arena (2010)).”
Firm dynamics and financial development (2012, background): “) . ( 5 ) If the entrepreneur chooses to default, his debts are written-off but he loses the project and the firm exits.”
The other side of value: The gross profitability premium. (2013, methodology): “These strategies are based on the failure probability measure of Campbell, Hilscher, and Szilagyi (2008), the default risk “O-score” of Ohlson (1980), net stock issuance, asset growth, total accruals, and (not considered in CNZ) Eisfeldt and Papanikolaou’s (2011) organizational capital based…”
A Network Approach to Portfolio Selection (2016, background): “In order to identify the key financial and market drivers of stocks’ centralities, we estimate an unbalanced quarterly-based panel regression largely inspired by Campbell et al. (2008) for the selection of relevant regressors.”
Are hazard models superior to traditional bankruptcy prediction approaches? A comprehensive test (2014, methodology): “…listed on the Main market segment of the London Stock Exchange at any time between 1979 and 2009, a total of 28,804 firm-year observations,2 we test two hazard models (Shumway, 2001; Campbell et al., 2008), the Taffler (1983) z-score model, and a contingent claims model (Bharath and Shumway, 2008).”
Financially Constrained Stock Returns (2009, neutral): “, Dichev (1998) and Campbell et al. (2008)). Moreover, it seems important to address the distress anomaly together with the credit spread puzzle (e.g., Huang and Huang (2003)). Bhamra, Kuehn, and Strebulaev (2007), Chen (2007), and Chen, Collin-Dufresne, and Goldstein (2007) make important progress ”