CIRJE-F-504 "Why some Distressed Firms Have Low Expected Returns"
Author Name Ikeda, Ryoichi and Takao Kobayashi
Date July 2007
Full Paper PDF file
Remarks Revised in September 2007.

In recent years, empirical researchers show that firms with higher credit risk have much smaller average stock returns. This finding is opposite to the risk-reward principle and is often attributed to mispricing and market anomalies. We investigate how credit risk and expected stock return are determined in a model with production, capital structure and aggregate uncertainty. We show that, contrary to the conventional wisdom, a firm with higher credit risk can have less risky stock than the one with lower credit risk.