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Title:

Default Risk and Equity Returns: A Comparison of the Bank-Based German and the U.S. Financial System

Description:

In this paper, we address the question whether the impact of default risk on equity returns depends on the financial system firms operate in. Using an implementation of Merton's option-pricing model for the value of equity to estimate firms' default risk, we construct a factor that measures the excess return of firms with low default risk over f...

In this paper, we address the question whether the impact of default risk on equity returns depends on the financial system firms operate in. Using an implementation of Merton's option-pricing model for the value of equity to estimate firms' default risk, we construct a factor that measures the excess return of firms with low default risk over firms with high default risk. We then compare results from asset pricing tests for the German and the U.S. stock markets. Since Germany is the prime example of a bank-based financial system, where debt is supposedly a major instrument of corporate governance, we expect that a systematic default risk effect on equity returns should be more pronounced for German rather than U.S. firms. Our evidence suggests that a higher firm default risk systematically leads to lower returns in both capital markets. This contradicts some previous results for the U.S. by Vassalou/Xing (2004), but we show that their default risk factor looses its explanatory power if one includes a default risk factor measured as a factor mimicking portfolio. It further turns out that the composition of corporate debt affects equity returns in Germany. Firms' default risk sensitivities are attenuated the more a firm depends on bank debt financing. Minimize

Publisher:

Ludwig-Maximilians-Universität München, Fakultät für Betriebswirtschaft München

Year of Publication:

2009

Document Type:

doc-type:workingPaper

Language:

eng

Subjects:

G12 ; ddc:650 ; Asset pricing ; Stochastic Discount Factor ; Default Risk ; Kapitalanlage ; Kapitaleinkommen ; CAPM ; Systemvergleich ; Aktienmarkt ; USA ; Deutschland

G12 ; ddc:650 ; Asset pricing ; Stochastic Discount Factor ; Default Risk ; Kapitalanlage ; Kapitaleinkommen ; CAPM ; Systemvergleich ; Aktienmarkt ; USA ; Deutschland Minimize

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Rights:

http://www.econstor.eu/dspace/Nutzungsbedingungen

http://www.econstor.eu/dspace/Nutzungsbedingungen Minimize

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Discussion Papers in Business Administration 2009-12

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Title:

Default Risk and Equity Returns: A Comparison of the Bank-Based German and the U.S. Financial System

Description:

In this paper, we address the question whether the impact of default risk on equity returns depends on the financial system firms operate in. Using an implementation of Merton's option-pricing model for the value of equity to estimate firms' default risk, we construct a factor that measures the excess return of firms with low default risk over f...

In this paper, we address the question whether the impact of default risk on equity returns depends on the financial system firms operate in. Using an implementation of Merton's option-pricing model for the value of equity to estimate firms' default risk, we construct a factor that measures the excess return of firms with low default risk over firms with high default risk. We then compare results from asset pricing tests for the German and the U.S. stock markets. Since Germany is the prime example of a bank-based financial system, where debt is supposedly a major instrument of corporate governance, we expect that a systematic default risk effect on equity returns should be more pronounced for German rather than U.S. firms. Our evidence suggests that a higher firm default risk systematically leads to lower returns in both capital markets. This contradicts some previous results for the U.S. by Vassalou/Xing (2004), but we show that their default risk factor looses its explanatory power if one includes a default risk factor measured as a factor mimicking portfolio. It further turns out that the composition of corporate debt affects equity returns in Germany. Firms' default risk sensitivities are attenuated the more a firm depends on bank debt financing. Minimize

Year of Publication:

2009-03-27

Document Type:

doc-type:workingPaper ; Paper ; NonPeerReviewed

Language:

eng

Subjects:

Betriebswirtschaft ; Diskussionsbeiträge ; Finance & Banking ; ddc:330

Betriebswirtschaft ; Diskussionsbeiträge ; Finance & Banking ; ddc:330 Minimize

DDC:

Relations:

http://epub.ub.uni-muenchen.de/10978/2/Breig_Elsas_Paper_v1r14b.pdf ; Breig, Christoph und Elsas, Ralf (2009): Default Risk and Equity Returns: A Comparison of the Bank-Based German and the U.S. Financial System. Münchener Wirtschaftswissenschaftliche Beiträge (BWL) 2009-12

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Title:

Default Risk and Equity Returns: A Comparison of the Bank-Based German and the U.S. Financial System

Description:

In this paper, we address the question whether the impact of default risk on equity returns depends on the financial system firms operate in. Using an implementation of Merton's option-pricing model for the value of equity to estimate firms' default risk, we construct a factor that measures the excess return of firms with low default risk over f...

In this paper, we address the question whether the impact of default risk on equity returns depends on the financial system firms operate in. Using an implementation of Merton's option-pricing model for the value of equity to estimate firms' default risk, we construct a factor that measures the excess return of firms with low default risk over firms with high default risk. We then compare results from asset pricing tests for the German and the U.S. stock markets. Since Germany is the prime example of a bank-based financial system, where debt is supposedly a major instrument of corporate governance, we expect that a systematic default risk effect on equity returns should be more pronounced for German rather than U.S. firms. Our evidence suggests that a higher firm default risk systematically leads to lower returns in both capital markets. This contradicts some previous results for the U.S. by Vassalou/Xing (2004), but we show that their default risk factor looses its explanatory power if one includes a default risk factor measured as a factor mimicking portfolio. It further turns out that the composition of corporate debt affects equity returns in Germany. Firms' default risk sensitivities are attenuated the more a firm depends on bank debt financing. ; Asset pricing; Stochastic Discount Factor; Default Risk Minimize

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preprint

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