This paper explores the determinants of corporate failure and the pricing of financially distressed stocks using U.S. data from 1963 to 2003. The authors estimate a dynamic panel model to predict bankruptcy and failure, finding that firms with higher leverage, lower profitability, lower market capitalization, lower past stock returns, more volatile past stock returns, lower cash holdings, higher market-book ratios, and lower prices per share are more likely to file for bankruptcy or be delisted. At longer horizons, market capitalization, the market-book ratio, and equity volatility become more significant predictors. The model captures much of the time variation in the aggregate failure rate. Since 1981, financially distressed stocks have delivered anomalously low returns but with higher standard deviations, market betas, and loadings on value and small-cap risk factors. These patterns are consistent across size quintiles but are particularly strong in smaller stocks. The findings suggest that the equity market has not properly priced distress risk.This paper explores the determinants of corporate failure and the pricing of financially distressed stocks using U.S. data from 1963 to 2003. The authors estimate a dynamic panel model to predict bankruptcy and failure, finding that firms with higher leverage, lower profitability, lower market capitalization, lower past stock returns, more volatile past stock returns, lower cash holdings, higher market-book ratios, and lower prices per share are more likely to file for bankruptcy or be delisted. At longer horizons, market capitalization, the market-book ratio, and equity volatility become more significant predictors. The model captures much of the time variation in the aggregate failure rate. Since 1981, financially distressed stocks have delivered anomalously low returns but with higher standard deviations, market betas, and loadings on value and small-cap risk factors. These patterns are consistent across size quintiles but are particularly strong in smaller stocks. The findings suggest that the equity market has not properly priced distress risk.