Do Nonfinancial Firms Use Financial Assets to Risk-Shift? Evidence from the 2014 Oil Price Crisis

51 Pages Posted: 8 Dec 2018 Last revised: 25 May 2019

See all articles by Zhiyao Chen

Zhiyao Chen

The Chinese University of Hong Kong (CUHK) - Department of Finance

Ran Duchin

University of Washington - Michael G. Foster School of Business

Date Written: May 2019

Abstract

Using hand-collected data on financial portfolios of firms in the oil industry, we investigate risk-shifting around the 2014 oil crisis. Following the crisis, firms with high leverage, particularly short-term, uncollateralized, and unhedged, substantially increase their investments in risky financial assets, including corporate debt, equity, and mortgage-backed securities. In contrast, they do not invest in riskier real assets, which are more visible, restricted by debt covenants, and carry higher transaction costs and delayed payoffs. Overall, we provide first evidence that distressed firms risk-shift using financial assets camouflaged as cash reserves, highlighting the role of debt maturity, collateral, and hedging in risk-shifting.

Keywords: risky financial assets, risk-shifting, debt maturity, collateral

JEL Classification: G30, G32, G33

Suggested Citation

Chen, Zhiyao and Duchin, Ran, Do Nonfinancial Firms Use Financial Assets to Risk-Shift? Evidence from the 2014 Oil Price Crisis (May 2019). Available at SSRN: https://ssrn.com/abstract=3284205 or http://dx.doi.org/10.2139/ssrn.3284205

Zhiyao Chen (Contact Author)

The Chinese University of Hong Kong (CUHK) - Department of Finance ( email )

Shatin, N.T.
Hong Kong

Ran Duchin

University of Washington - Michael G. Foster School of Business ( email )

Box 353200
Seattle, WA 98195-3200
United States

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