We test whether default risk is related to equity returns using the Fama and MacBeth [Fama, E.F., MacBeth, J., 1973. Risk, return, and equilibrium: empirical tests. Journal of Political Economy 81, 607-636.] regression framework. The proxy we use for default risk is the default probability obtained from option-based models. Our findings show that default probability is negatively related to returns. While we find that size and book-to-market are related to default risk, the ability of these variables to explain cross-sectional variation in returns is not because they are proxying default risk. Further, our evidence suggests that the negative relationship between default probability and returns is not due to a leverage, volatility or momentum effect.