Resource title

Bankruptcy happens: a study of the mechanics distress-driven CAPM anomalies

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After incorporating bankruptcy risk explicitly into estimates of expected returns the author shows that traditional CAPM measurement techniques are biased, and that the magnitude and sign of the errors incurred depends on distress and cyclicality. The analysis leads to maximum likelihood estimators for probability of bankruptcy and cyclicality implicit in stock return distributions. These results are consequential for studies of distress-related CAPM anomalies. They also indicate that there is a unique role for accrual accounting data in valuation to the extent that they lead to more forward-looking measures of distress and cyclicality than models based on historical rates of return.

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en

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application/pdf

Resource resource URL

http://flora.insead.edu/fichiersti_wp/inseadwp2001/2001-111.pdf

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Copyright INSEAD. All rights reserved