The Black Swan Problem: The Role of Capital, Liquidity and Operating Flexibility

38 Pages Posted: 4 Jun 2021 Last revised: 14 Jun 2021

See all articles by Nick Christie

Nick Christie

Lund University - Department of Business Administration

Nicoletta Marinelli

University of Macerata - Department of Economics and Law

Håkan Jankensgård

Lund University - Department of Business Administration; Knut Wicksell Centre for Financial Studies

Date Written: June 3, 2021

Abstract

How firms cope with tail risk is an under researched problem in the literature on corporate risk management. This paper presents stylized facts on the nature of revenue shocks based on 65 years worth of Compustat data. We define a Black Swan as an unexpected year-on-year drop in revenue between 30-90%. The rate of Black Swans has increased markedly since the 1970s and there are more pronounced cyclical peaks in the three most recent decades. We also examine the role of three general determinants of firms’ ability to absorb Black Swans: equity capital, liquidity, and operating flexibility. The conclusion to emerge from this analysis is that the deciding factor in mediating the effects of revenue shocks on employment is liquidity. Cash reserves and cash margins make firms less fragile, but neither equity capital nor operating flexibility robustly buffer against Black Swans.

Keywords: Revenue risk, Financial constraints, Black swan, Financial slack

JEL Classification: G30, G32

Suggested Citation

Christie, Nick and Marinelli, Nicoletta and Jankensgård, Håkan, The Black Swan Problem: The Role of Capital, Liquidity and Operating Flexibility (June 3, 2021). Available at SSRN: https://ssrn.com/abstract=3859637 or http://dx.doi.org/10.2139/ssrn.3859637

Nick Christie

Lund University - Department of Business Administration ( email )

Box 117
SE-221 00 Lund, S-220 07
Sweden

Nicoletta Marinelli

University of Macerata - Department of Economics and Law ( email )

Piazza Strambi, 1
Macerata, Macerata 62100
Italy

Håkan Jankensgård (Contact Author)

Lund University - Department of Business Administration ( email )

Box 117
SE-221 00 Lund, S-220 07
Sweden

Knut Wicksell Centre for Financial Studies ( email )

Box 7080
Lund, SE-220 07
Sweden

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