Does distress risk explain size and book-to-market effects?

By Vineet Agarwal and Sunil Poshakwale:

Cranfield University School of Management,

자료: http://www.ceram.fr/v3/R7_modules/R7-5_contenu/R7-5-1_type1/R7-5-1-0_media/R7-5-1-0-1_contenu_html/ACF8EED.pdf

※ Keywords: Fama and French model, distress factor, z-score

※ Abstract: Majority of asset pricing research attributes the observed size and book-to-market

(B/M) effects in stock returns to high distress risk. We provide evidence that higher

returns earned by small stocks and high B/M stocks are not related to distress risk. We

find that whilst the size factor (SMB) proxies for distress risk, the book-to-market factor

(HML) is orthogonal to this risk. We also demonstrate that performance of the three

factor model of Fama and French (1993) is weaker in the UK. Future research should

consider the limitations of the Fama and French model in calculating the risk premium

particularly in case of the distressed stocks in the UK.