Rights statement: 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, https://doi.org/10.1093/rof/rfy028 is available online at: https://academic.oup.com/rof/article/23/6/1115/5077242
Accepted author manuscript, 2.48 MB, PDF document
Available under license: CC BY-NC: Creative Commons Attribution-NonCommercial 4.0 International License
Final published version
Research output: Contribution to Journal/Magazine › Journal article › peer-review
Research output: Contribution to Journal/Magazine › Journal article › peer-review
}
TY - JOUR
T1 - In the Path of the Storm
T2 - Does Distress Risk Cause Industrial Firms to Risk-Shift?
AU - Aretz, Kevin
AU - Banerjee, Shantanu
AU - Pryshchepa, Oksana
N1 - 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, https://doi.org/10.1093/rof/rfy028 is available online at: https://academic.oup.com/rof/article/23/6/1115/5077242
PY - 2019/10/31
Y1 - 2019/10/31
N2 - 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.
AB - 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.
KW - Agency conflicts
KW - risk-shifting
KW - distress risk
KW - segment data
KW - hurricane strikes
U2 - 10.1093/rof/rfy028
DO - 10.1093/rof/rfy028
M3 - Journal article
VL - 23
SP - 1115
EP - 1154
JO - Review of Finance
JF - Review of Finance
SN - 1572-3097
IS - 6
ER -