In the path of the storm:does distress risk cause industrial firms to risk-shift

Banerjee, Shantanu and Pryshchepa, Oksana and Aretz, Kevin (2018) In the path of the storm:does distress risk cause industrial firms to risk-shift. Review of Finance. ISSN 1572-3097

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Abstract

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.

Item Type: Journal Article
Journal or Publication Title: Review of Finance
Additional Information: 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 is available online at: https://academic.oup.com/rof/advance-article/doi/10.1093/rof/rfy028/5077242
Uncontrolled Keywords: /dk/atira/pure/subjectarea/asjc/2000/2003
Subjects:
Departments: Lancaster University Management School > Accounting & Finance
ID Code: 127350
Deposited By: ep_importer_pure
Deposited On: 19 Sep 2018 14:02
Refereed?: Yes
Published?: Published
Last Modified: 07 Dec 2019 04:53
URI: https://eprints.lancs.ac.uk/id/eprint/127350

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