In the path of the storm: Does financial distress cause non-financial firms to risk-shift?

Shantanu Banerjee, Lancaster University
Event information
Date 14th October 2015
Time 1:00pm - 2:00pm
Venue ICMA Centre, Room G03/04
Event types:
Research Seminars

We use a new proxy capturing manager-initiated changes to firm risk together with a unique identification strategy to study whether financial distress causes non-financial firms to risk-shift. We derive the proxy from an application of modern portfolio theory to operating-segment data and use hurricanes as distress risk instrument. Distress risk shocks lead moderately distressed firms to risk-shift. Risk-shifting is facilitated by closing low-risk segments and raises failure rates. Further evidence suggests that creditor control keeps highly distressed firms from risk-shifting. Despite its importance, we are first to empirically show that agency problems of debt cause non-financial firms to risk-shift.

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