Zooming in on Distress Risk : Bankruptcy vs. Other Failures

Bankruptcy and delisting due to other failures are two closely related yet sharply different distress events. Using a state-of-the-art adaptive Lasso variable selection method, we identify two different models for bankruptcy risk and other-failure risk. Both selected models gain better out-of-sample prediction performances than standard models in the literature. We further investigate the asset-pricing implications and document a persistently positive risk premium associated with bankruptcy risk, whereas the firms with high other-failure risk do not earn significant abnormal returns. In addition, high bankruptcy risk firms and high other-failure risk firms differ significantly in their institutional ownership, analyst coverage, and corporate news releases