| This thesis examines the relation between the bankruptcy risk and stock returns in the Japanese market for the period from 1980 to 2000. We use the ownership by financial companies as well as the ratio of loans to total liabilities to proxy for the bank dependence. It turns out that bank dependence does help reduce the probability of bankruptcy for the Japanese firms. Thus, we estimate Z, O and X scores using the Japanese data to represent the bankruptcy risk. Here, X score is a new measure of bankruptcy risk incorporating the effects of both the bank dependence and the other accounting ratios used in Altman (1968) and Ohlson (1980). It is found that the bankruptcy risk is rewarded by higher expected returns from 1980 to 2000. However, the closer look at the results in subperiods indicates that the bankruptcy risk is not really priced. The significant relation between the bankruptcy risk and stock returns only during the bubble period should result from the irrational overvaluation in the Japanese stock market at that time. The industry analysis further confirms this conjecture. Additionally, the size effect may proxy for the bankruptcy risk to some extent. Nonetheless, the book-to-market effect cannot be accounted for by the distress risk related to bankruptcy. |
