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Is the Risk of Bankruptcy a Systematic Risk?

Ilia D. Dichev
The Journal of Finance
Vol. 53, No. 3 (Jun., 1998), pp. 1131-1147
Published by: Wiley for the American Finance Association
Stable URL: http://www.jstor.org/stable/117389
Page Count: 17
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Since scans are not currently available to screen readers, please contact JSTOR User Support for access. We'll provide a PDF copy for your screen reader.
Is the Risk of Bankruptcy a Systematic Risk?
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Abstract

Several studies suggest that a firm distress risk factor could be behind the size and the book-to-market effects. A natural proxy for firm distress is bankruptcy risk. If bankruptcy risk is systematic, one would expect a positive association between bankruptcy risk and subsequent realized returns. However, results demonstrate that bankruptcy risk is not rewarded by higher returns. Thus, a distress factor is unlikely to account for the size and book-to-market effects. Surprisingly, firms with high bankruptcy risk earn lower than average returns since 1980. A risk-based explanation cannot fully explain the anomalous evidence.

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