Firms with higher default risk may have lower expected equity returns than those with lower default risk. Changes in default risk due to expected asset payment and debt are linked to changes in equity returns, but for highly distressed firms, lower volatility can have a mixed impact on equity returns. When default risk is very high, higher volatility can benefit equity-holders by increasing the chance of positive payments, but it can also shift probability towards less desirable outcomes. The default risk premium is also influenced by macroeconomic conditions. Initial evidence supports these ideas.