Default Risk, Shareholder Advantage, and Stock Returns

• 成果类型: Article
• 署名作者: Garlappi, Lorenzo; Shu, Tao; Yan, Hong
• 署名单位: University of Texas System; University of Texas Austin; University System of Georgia; University of Georgia; University of South Carolina System; University of South Carolina Columbia
• 刊物名称: REVIEW OF FINANCIAL STUDIES
• ISSN/ISSBN: 0893-9454
• DOI: 10.1093/rfs/hhl044
• 发表日期: 2008
• 页码: 2743
• 关键词: STRATEGIC DEBT-SERVICE; ABSOLUTE PRIORITY; FINANCIAL RATIOS; bankruptcy; prediction; CHAPTER-11; valuation; equity; equilibrium; performance

摘要

This paper examines the relationship between default probability and stock returns. Using the Expected Default Frequency (EDF) of Moody's KMV, we document that higher default probabilities are not associated with higher expected stock returns. Within a model of bargaining between equity holders and debt holders in default, we show that the relationship between default probability and equity return is (i) upward sloping for firms where shareholders can extract little benefit from renegotiation (low shareholder advantage) and (ii) humped and downward sloping for firms with high shareholder advantage. This dichotomy implies that distressed firms with stronger shareholder advantage should exhibit lower expected returns in the cross section. Our empirical evidence, based on several proxies for shareholder advantage, is consistent with the model's predictions.