Chapter 11 - Is Bankruptcy a Systematic Risk? Evidence From Vietnam

Abstract

There is conflicting evidence reported in the existing academic literature regarding the pricing of bankruptcy risk. Also, existing studies concentrate on developed and emerging markets (to some extent), but not on frontier markets. We aim to investigate the pricing of bankruptcy risk by using the DLI (default likelihood indicator) bankruptcy estimation model developed by Vassalou and Xing [Vassalou, M., Xing, Y., 2004. Default risk in equity returns. J. Finance 59 (2), 831–868]. The most recent global financial crisis (GFC) was chosen as an ideal test period for this study. Firms listed on the Ho Chi Minh City Stock Exchange in Vietnam during the precrisis period of Jul. 1, 2007 to Sep. 14, 2008; the crisis period of Sep. 15, 2008 to Mar. 31, 2009; and the postcrisis period of Apr. 1, 2009 to Dec. 31, 2010 were analyzed. The DLI bankruptcy risk measures were assessed using both regression and mimicking portfolio analysis. We observed a significantly positive relationship between stock returns and bankruptcy risk with portfolio analysis, by conducting analysis in which the portfolios were formed using a medium BM (book-to-market) factor and controlling for DLI-sorted stocks. As expected, we also found a significant relationship between stock returns and bankruptcy risk during the post-GFC period, as measured by the average default likelihood indicator (ADLI) developed by Vassalou and Xing [Vassalou, M., Xing, Y., 2004. Default risk in equity returns. J. Finance 59 (2), 831–868].