Corporate Financial Portfolio and Distress Risk: Forewarned is Forearmed

66 Pages Posted: 18 Feb 2021 Last revised: 24 Jan 2022

See all articles by Xuesheng Chen

Xuesheng Chen

Shandong University - School of Business

Caixia Liu

Shandong University - School of Business

Zhangxin Frank Liu

The University of Western Australia Business School

Yongkang Stanley Huang

Columbia University - Columbia Business School, Accounting, Business Law & Taxation

Date Written: December 23, 2020

Abstract

This paper explores how corporate financial portfolios influence distress risk. We define distress risk as a dummy variable that denotes whether firms need external subsidies to repay their interest payable. The findings of our analysis, which covers 3,698 listed firms in China between 2007 and 2019, are twofold. First, financial portfolios are associated with less distress risk, especially in start-up firms and recession firms. Second, this impact is more pronounced for firms with financial portfolios featuring higher levels of liquidity. Furthermore, the impact is enhanced for firms with executives who have had financial careers. Our findings are robust to the use of an instrumental variable, namely, the geographical distance between the focal bank and firm. Our findings imply that corporate financial portfolios prevent distress risk by relaxing borrowing constraints and improving profitability.

Keywords: Financial portfolio; Distress risk; Executives’ financial careers; Financing constraints; Corporate profitability.

JEL Classification: G31; G32; L25.

Suggested Citation

Chen, Xuesheng and Liu, Caixia and Liu, Zhangxin (Frank) and Huang, Yongkang Stanley, Corporate Financial Portfolio and Distress Risk: Forewarned is Forearmed (December 23, 2020). Available at SSRN: https://ssrn.com/abstract=3754169 or http://dx.doi.org/10.2139/ssrn.3754169

Xuesheng Chen

Shandong University - School of Business ( email )

Caixia Liu

Shandong University - School of Business ( email )

Zhangxin (Frank) Liu

The University of Western Australia Business School ( email )

School of Business
35 Stirling Highway
Crawley, Western Australia 6009
Australia

Yongkang Stanley Huang (Contact Author)

Columbia University - Columbia Business School, Accounting, Business Law & Taxation ( email )

3022 Broadway
New York, NY 10027
United States

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