How Important is Financial Risk?

79 Pages Posted: 17 Mar 2008 Last revised: 10 Mar 2014

See all articles by Söhnke M. Bartram

Söhnke M. Bartram

Warwick Business School - Department of Finance

Gregory W. Brown

University of North Carolina (UNC) at Chapel Hill - Finance Area

William Waller

Carnegie Mellon University - David A. Tepper School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: February 25, 2013

Abstract

We explore the determinants of equity price risk for a large sample of non-financial corporations. By estimating both cross-sectional and time-series models, we show that operating and asset characteristics are by far the most important determinants of equity price risk. In contrast, for the average (median) firm, financial risk accounts for less than a third (15%) of observed stock price volatility. This explains why financial distress (as opposed to economic distress) was surprisingly uncommon in the nonfinancial sector during the recent crisis even as measures of equity volatility reached unprecedented highs.

Keywords: Capital structure, financial risk, risk management, corporate finance

JEL Classification: G3, F4, F3

Suggested Citation

Bartram, Söhnke M. and Brown, Gregory W. and Waller, William, How Important is Financial Risk? (February 25, 2013). AFA 2009 San Francisco Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1031910 or http://dx.doi.org/10.2139/ssrn.1031910

Söhnke M. Bartram

Warwick Business School - Department of Finance ( email )

Coventry, CV4 7AL
United Kingdom
+44 (24) 7657 4168 (Phone)
+1 425 952 1070 (Fax)

HOME PAGE: http://go.warwick.ac.uk/sbartram/

Gregory W. Brown (Contact Author)

University of North Carolina (UNC) at Chapel Hill - Finance Area ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

William Waller

Carnegie Mellon University - David A. Tepper School of Business ( email )

Pittsburgh, PA
United States

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