Abstract

http://ssrn.com/abstract=782425
 
 

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Financial Distress and Corporate Risk Management: Theory & Evidence


Amiyatosh K. Purnanandam


University of Michigan, Stephen M. Ross School of Business

January 2007


Abstract:     
This paper extends the current theoretical models of corporate risk-management in the presence of financial distress costs and tests the model's predictions using a comprehensive dataset. I show that the shareholders optimally engage in ex-post (i.e., after the debt issuance) risk-management activities even without a pre-commitment to do so. The model predicts a positive relation between leverage and hedging for moderately leveraged firms, which reverses for highly leveraged firms. Consistent with the theory, empirically I find a non-monotonic relation between leverage and hedging. Further, the effect of leverage on hedging is higher for firms in highly concentrated industries.

Number of Pages in PDF File: 51

Keywords: Hedging, financial distress, risk-shifting, derivatives

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Date posted: March 25, 2005  

Suggested Citation

Purnanandam, Amiyatosh K., Financial Distress and Corporate Risk Management: Theory & Evidence (January 2007). Available at SSRN: http://ssrn.com/abstract=782425 or http://dx.doi.org/10.2139/ssrn.782425

Contact Information

Amiyatosh K. Purnanandam (Contact Author)
University of Michigan, Stephen M. Ross School of Business ( email )
701 Tappan Street
Ann Arbor, MI MI 48109
United States
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