Book-to-market ratio, default risk and return implications: from a negative perspective

Li, Bob, Lajbcygier, Paul and Chen, Cindy 2015, Book-to-market ratio, default risk and return implications: from a negative perspective, JASSA, no. 3, 2015, pp. 26-32.

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Title Book-to-market ratio, default risk and return implications: from a negative perspective
Author(s) Li, Bob
Lajbcygier, Paul
Chen, Cindy
Journal name JASSA
Issue number 3
Season 2015
Start page 26
End page 32
Total pages 7
Publisher FINSIA
Place of publication Sydney, N.S.W.
Publication date 2015-09-28
ISSN 0313-5934
Summary A paradox is created by the common practice in stock evaluation models of excluding stocks with a negative book equity (BE). If we interpret the book-to-market ratio as a proxy for distress risk, it makes no sense to exclude these negative BE stocks since they are, prima facie, most prone to distress risk. This paper reassesses the relationship between default risk, return and the book-to-market ratio by incorporating negative BE stocks into the study. We find that negative BE stocks carry higher default risks than their positive BE counterparts and that these risks are not totally offset by higher returns. This suggests that a default risk filter can be used in the investment universe selection process through which the portfolio return can be enhanced.
Language eng
Field of Research 150201 Finance
Socio Economic Objective 900102 Investment Services (excl. Superannuation)
HERDC Research category C1 Refereed article in a scholarly journal
Copyright notice ©2015, FINSIA
Persistent URL http://hdl.handle.net/10536/DRO/DU:30079105

Document type: Journal Article
Collection: School of Accounting, Economics and Finance
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