Is the Value Premium Really a Compensation for Distress Risk?



This study provides an in-depth investigation of the relation between the value anomaly and distress risk. Besides measures based on accounting and equity market variables that are used in earlier studies, we additionally employ bond characteristics like credit spread and rating to proxy for distress risk. Our main finding is that the value effect is not concentrated in distressed stocks. We show that the reported positive relation between the value premium and distress risk is not robust to the size effect. In fact, once corrected for the size effect, the return of value stocks is negatively related to distress risk. This result holds irrespective of which measure we use for distress risk. Our findings are inconsistent with the notion that the value effect is a compensation for distress risk.
Contact information:
Sebastian Gryglewicz
The Brown Bag Seminars are sponsored by ERIM.