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

Aretz, Kevin, 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. 10.1093/rof/rfy028

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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 toward 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: Article
Date Type: Publication
Status: Published
Schools: Business (Including Economics)
Publisher: Oxford University Press
ISSN: 1572-3097
Date of First Compliant Deposit: 13 December 2019
Date of Acceptance: 27 July 2018
Last Modified: 21 Aug 2020 02:05
URI: http://orca.cf.ac.uk/id/eprint/127522

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