We examine explicitly priced financial distress risk in post-1990 equity markets. We add a financial distress risk factor to Fama and French's (1993) three-factor model, based on Griffin and Lemmon's (2002) findings that financial distress is not fully captured by the book-to-market factor. We test three-factor and four-factor capital asset pricing models using both annual buy-and-hold analysis and monthly time series analysis across portfolios adjusted for common book-to-market, size, and financial distress factors. We find empirical support for an Ohlson (1980) O-score-based financial distress risk four-factor asset pricing model in the U.S. and Japanese markets.
Lai, S.-C., Li, H.-C., Conover, J.A. and Wu, F. (2010), "O-score financial distress risk asset pricing", Kensinger, J.W. (Ed.) Research in Finance (Research in Finance, Vol. 26), Emerald Group Publishing Limited, Bingley, pp. 51-94. https://doi.org/10.1108/S0196-3821(2010)0000026006
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