5 Asanextremeexample,considerestimatingabetaforEnron
attheendof2001.ThebetaestimatefromBloomberg,using
two years of data, was 1.45. Over three-quarters of this
period,Enronwasviewed(rightlyorwrongly)asahealthy
firmwithpositiveearnings.Itisonlyinthelastpartofthe
regressionperiodthatyouseetheeffectsofdistressonstock
prices and the debt-to-equity ratio of the firm.
6 For more on bottom-up betas, refer to Chapter 2.
7 Thereareothervariationsonthisleverageadjustment.Some
analysts,for instance, prefera more complete version that
allowsdebttocarrysystematicriskandhaveabeta.Others
prefertoeliminatethetaxadjustment.Stillothersarguefor
other ways of adjusting betas for distress risk.
8 EugeneF.FamaandKennethR.French,“TheCrossSection
ofExpectedStockReturns,”Journal ofFinance 47 (1992):
427–465.Theargument thatthereturnpremiumearned by
lowpricetobookstocksisduetodistressiscontestedinother
studies.
9 IlyaD. Dichev,“Is theRisk ofBankruptcy a Systematic
Risk?,” Journal of Finance 53 (1998): 1131–1147; J. Y.
Campbell,J.Hilscher,andJ.Szilagyi,“InSearchofDistress
Risk,” SSRN working paper, 2005.
10 The yields to maturity on bonds issued by companies
where there is a significant probability of distress willbe
stratospheric, becausetheyarebasedonthepromisedcash
flows on the bond, rather than expected cash flows.