Accounting Fundamentals and Systematic Risk: Corporate Failure over the Business Cycle
Ogneva, Maria, Piotroski, Joseph D., Zakolyukina, Anastasia A.
The Accounting Review · 2020 · Volume 95 · Issue 5
Abstract
In this paper, we use accounting fundamentals to measure systematic risk of distress. Our main testable prediction—that this risk increases with the probability of recessionary failure,P(R|F)—is based on a stylized model that guides our empirical analyses. We first apply thelassomethod to select accounting fundamentals that can be combined intoP(R|F) estimates. We then use the obtained estimates in asset-pricing tests. This approach successfully extracts systematic risk information from accounting data—we document a significant positive premium associated withP(R|F) estimates. The premium covaries with the news about the business cycle and aggregate failure rates. Additional tests underscore the importance of the “structure” imposed through recessionary-failure-probability estimation. The “agnostic” return predictor that relies only on past correlations between thesamefundamental variables and returns exhibits markedly different properties. JEL Classifications:G12; G32; G33; M41.
Keywords
systematic risk, distress, business cycle, expected returns, accounting fundamentals
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