Corporate Financial Portfolio and Distress Risk: Forewarned is Forearmed

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.