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
Date Written: May 2019
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: Suggested Citation