In the Path of the Storm: Does Distress Risk Cause Industrial Firms to Risk-Shift?

70 Pages Posted: 2 Feb 2015 Last revised: 26 Jul 2018

See all articles by Kevin Aretz

Kevin Aretz

Alliance Manchester Business School

Shantanu Banerjee

Lancaster University - Management School

Oksana Pryshchepa

Cardiff University Business School; Lancaster University - Department of Accounting and Finance

Date Written: July 16, 2018

Abstract

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.

Keywords: Agency conflicts, risk-shifting, distress risk, segment data, hurricane strikes

JEL Classification: G32, G33

Suggested Citation

Aretz, Kevin and Banerjee, Shantanu and Pryshchepa, Oksana, In the Path of the Storm: Does Distress Risk Cause Industrial Firms to Risk-Shift? (July 16, 2018). Available at SSRN: https://ssrn.com/abstract=2558756 or http://dx.doi.org/10.2139/ssrn.2558756

Kevin Aretz

Alliance Manchester Business School ( email )

Crawford House
Oxford Road
Manchester M13 9PL, Lancashire
United Kingdom
+44(0) 161 275 6368 (Phone)
+44(0) 161 275 4023 (Fax)

HOME PAGE: http://www.kevin-aretz.com

Shantanu Banerjee

Lancaster University - Management School ( email )

Lancaster, Lancashire LA1 4YX
United Kingdom

Oksana Pryshchepa (Contact Author)

Cardiff University Business School ( email )

Cardiff CF10 3EU
United Kingdom

HOME PAGE: http://https://www.cardiff.ac.uk/people/view/1700999-pryshchepa-oksana

Lancaster University - Department of Accounting and Finance ( email )

Lancaster, Lancashire LA1 4YX
United Kingdom

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