In an equilibrium Black and Scholes (1973) economy, a firm's default risk and its expected equity return are non-monotonically related. This may explain the surprising relation found between these two variables in recent empirical research. Although changes in default risk induced by expected...

This study constructs a novel dataset of bankruptcy filings for a large sample of non-US firms in 14 developed markets and sheds new light on the cross-sectional relation between default risk and stock returns. Using the reduced-form approach of Campbell et al. (2008) to estimate default...