How Important Is Financial Risk?
Söhnke M. Bartram
Warwick Business School - Department of Finance; New York University (NYU) - Department of Finance
Gregory W. Brown
University of North Carolina (UNC) at Chapel Hill - Finance Area
Carnegie Mellon University - David A. Tepper School of Business
April 22, 2013
Journal of Financial and Quantitative Analysis (JFQA), Forthcoming
We explore the determinants of equity price risk of non-financial corporations. Operating and asset characteristics are by far the most important determinants of risk. For the median firm,financial risk accounts for only 15% of observed stock price volatility. Furthermore, financial risk has declined over the last three decades indicating that any upward trend in equity volatility was driven entirely by economic risk factors. 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.
Number of Pages in PDF File: 88
Keywords: capital structure, financial risk, risk management, corporate finance
JEL Classification: G3, F4, F3
Date posted: August 10, 2013