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Korean Journal of Financial Studies 2016;45(5):1097-1129.
Published online December 31, 2016.
A Study on the Financial Distress Risk Puzzle in Korea
Inro Lee, Dongcheol Kim
국내 주식시장의 부도위험 이례현상에 관한 연구
이인로, 김동철
There has been no consensus in the finance literature in Korea on whether the financial distress risk puzzle, which is a negative relation between financial distress and subsequent stock returns in the cross-section, is prominent in the Korean stock markets. By using various bankruptcy prediction models and a longer time-series of stock return data, we examine which cause(s) drives the conflicting results on the financial distress risk puzzle. We find that one of the main causes is the inclusion or not of a specific sample period such as 1999~2000, which is the period of the internet bubble. When this period is excluded, we find that the financial distress puzzle is prominent. However, when this period is included, the puzzle is no longer observed, since during this period, small-sized firms with high financial distress earn high return. We also find that the financial distress puzzle is related with future profitability and the puzzle is well explained by a four-factor model including the Fama-French three-factor plus the profitability factor.
Key Words: 4-요인모형,부도예측모형,부도위험 이례현상,수익성요인,신용등급,Bankruptcy Prediction Model,Credit Rating,Factor Models,Financial Distress Risk Puzzle,Profitability

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