Abstract
Abstract Work in finance suggests that changes in the probability of bankruptcy likely affect firm value by affecting perceptions of the cost of transacting with the firm. In this paper, accounting information from the balance sheet as well as the income statement is used in conjunction with Ohlson's (1980) bankruptcy prediction model to calculate unexpected changes in the probability of bankruptcy. For a sample of firms with a large estimated probability of bankruptcy sometime during the ten-year study period, unexpected changes in the probability of bankruptcy are useful in explaining security returns even after controlling for unexpected earnings.
Published Version
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