An Analysis of Risk and Return Characteristics of Corporate Bankruptcy Using Capital Market Data

Most of the empirical research in this area has used accounting data, comparing the ability of various financial ratios to predict corporate failure.' Typically, the time series behavior of various financial ratios for a sample of failed firms is compared with that of a control group of nonfailed firms. It seems safe to say that the various empirical models that have used financial ratios have been successful in discriminating between failing and nonfailing firms several years before bankruptcy actually occurred. Regardless of the success of the accounting ratio models, they really have little or no definitive theoretical foundation. Instead, the financial ratios are simply utilized in various statistical procedures until they do, in fact, work. Perhaps because of this success, market-derived data have received little attention in studies of corporate bankruptcy.2 However, market data can provide a satisfying