In the Path of the Storm:Does Distress Risk Cause Industrial Firms to Risk-Shift?

Aretz, Kevin and Banerjee, Shantanu and Pryshchepa, Oksana (2019) In the Path of the Storm:Does Distress Risk Cause Industrial Firms to Risk-Shift? Review of Finance, 23 (6). pp. 1115-1154. ISSN 1572-3097

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We study whether industrial firms risk-shift in response to distress risk increases induced through hurricane strikes. Using new proxies capturing deliberate managerial decisions about the risk of a firm’s operating segment portfolio, differences tests suggest that hurricane strikes prompt moderately, but not highly, distressed firms to skew their asset mixes towards riskier segments by shutting down low-risk, high-average-Q segments. In turn, the moderately distressed firms observe abnormally high failure rates after a hurricane strike. Employing covenant violation data, we offer further evidence that creditor control prevents highly distressed firms from raising their risk. Our conclusions extend those of other studies by suggesting that moderate distress risk levels can lead the managers of industrial firms to not only engage in risk-taking, but, in fact, in risk-shifting.

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Journal Article
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Review of Finance
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This is a pre-copy-editing, author-produced PDF of an article accepted for publication in Review of Finance following peer review. The definitive publisher-authenticated version Kevin Aretz, Shantanu Banerjee, Oksana Pryshchepa, In the Path of the Storm: Does Distress Risk Cause Industrial Firms to Risk-Shift?, Review of Finance, Volume 23, Issue 6, October 2019, Pages 1115–1154, is available online at:
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19 Sep 2018 14:02
Last Modified:
18 Oct 2023 01:23