Fama and French (1992) suggest that the positive value premium results from risk of financial distress. However, recent empirical research has found that financially distressed firms have lower stock returns, using empirical estimates of default probabilities. This paper reconciles the positive...

We provide a comprehensive and up-to-date synthesis of empirical studies examining company-specific risk premiums (CSRPs). We cover a number of new papers that have revived an academic debate as to whether or not company-specific risk is priced into the cost of capital. We show that the current...

We incorporate long-term defaultable corporate bonds and credit risk in a dynamic stochastic general equilibrium business cycle model. Credit risk amplifies aggregate technology shocks. The debt-capital ratio is a new state variable and its endogenous movements provide a propagation mechanism....

Fama and French (1992) suggest that the positive value premium results from financial distress risk. However, recent empirical research finds that financially distressed firms have lower stock returns, by using empirical estimates of default probabilities. This paper reconciles the positive...

We incorporate long-term defaultable corporate bonds and credit risk in a dynamic stochastic general equilibrium business cycle model. Credit risk amplifies aggregate technology shocks. The debt-capital ratio is a new state variable and its endogenous movements provide a propagation mechanism....

The distress puzzle refers to the empirical regularity that firms with high measures of default likelihood earn anomalously low returns, despite having relatively high CAPM betas. This paper shows it is possible to qualitatively explain this anomaly using a consumption-based asset pricing model...

I propose a neoclassical production economy with costly external financing, partial investment irreversibility, and endogenous investment/financing decisions to rationalize and quantify the well-documented interaction between the book-to-market equity effect and the financial leverage effect in...

Campbell, Hilscher, and Szilagyi (2008) show that firms with a high probability of default have significantly low average future returns. We show that there is a large overlap between stocks classified as high default risk, and those that are likely to produce extremely high returns over the...

Changes in collateralization have been implicated in significant default (or near-default) events during the financial crisis, most notably with AIG. We have developed a framework for quantifying this effect based on moving between Merton-type and Black-Cox-type structural default models. Our...

We introduce a new approach to measuring riskiness in the equity market. We propose option implied and physical measures of riskiness and investigate their performance in predicting future market returns. The predictive regressions indicate a positive and significant relation between...