We build a dynamic model to link two empirical patterns:\ the negative failure probability-return relation (Campbell, Hilscher, and Szilagyi, 2008) and the positive distress risk premium-return relation (Friewald, Wagner, and Zechner, 2014). We show analytically and quantitatively that (i)...

This paper examines the pricing of public debt in a quantitative macroeconomic model with government default risk. Default may occur due to a fiscal policy that does not preclude a Ponzi game. When a build-up of public debt makes this outcome inevitable, households stop lending such that the...

This paper quantifies the premium demanded by the investors for bearing the corporate default risk. We propose a novel approach that exploits the information in both credit default swap (CDS) spreads and stock prices, using the pricing restrictions provided by a structural model of credit risk....

Since 1990, there has been substantial debate in both the popular press and academic materials about earnings management by multinational companies and the capital markets (ie. microstructure; raising capital) effects of their rampant uses of Dividend-Equivalent Rights (“DERs”) and...

The value premium is the empirical observation that low market/book “value” stocks have higher returns than high market/book “growth” stocks. In this paper, we report evidence that there is a value premium for firms in financial distress despite the anomalous observation that firms in...