The Financial Risks of Corporations in the Global Economy

41 Pages Posted: 8 Jul 2005

See all articles by Söhnke M. Bartram

Söhnke M. Bartram

Warwick Business School - Department of Finance; Centre for Economic Policy Research (CEPR)

Gregory W. Brown

University of North Carolina (UNC) at Chapel Hill - Finance Area

Date Written: March 15, 2006

Abstract

We comprehensively examine the cross-sectional determinants of financial risk for a large sample of non-financial corporations in over 40 countries. The level of total firm risk depends on many firm-specific operating and financial characteristics. Consistent with theoretical models and some prior empirical evidence for U.S. firms, the level and type of assets, as well as profitability characteristics, are significant drivers of total risk. In contrast, most financial characteristics are less important, but surprisingly, dividend policy has the strongest effect on total risk of all factors we consider. We also decompose total risk into market risk and firm-specific risk. Contrary to some theoretical predictions, our results indicate that many similar factors determine each type of risk though not necessarily in equal proportions. However, some factors such as foreign operations and asset liquidity are only significant determinants of market risk. Interestingly, the effects of operating and financial characteristics on firm risk depend on the overall level of economic and financial risk in a firm's home-country. For example, asset tangibility and the use of interest rate derivatives are only important in countries with high financial risk. Finally, we find that many determinants of total firm risk also have important effects on firm value in the way predicted by theory.

Keywords: Financial risk, risk management, credit risk, corporate finance, international finance

JEL Classification: G3, F4, F3

Suggested Citation

Bartram, Söhnke M. and Brown, Gregory W., The Financial Risks of Corporations in the Global Economy (March 15, 2006). EFA 2005 Moscow Meetings, Forthcoming; WBS Finance Group Research Paper No. 46. Available at SSRN: https://ssrn.com/abstract=670862 or http://dx.doi.org/10.2139/ssrn.670862

Söhnke M. Bartram

Warwick Business School - Department of Finance ( email )

Coventry, CV4 7AL
United Kingdom
+44 (24) 7657 4168 (Phone)
+1 425 952 1070 (Fax)

HOME PAGE: http://go.warwick.ac.uk/sbartram/

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Gregory W. Brown (Contact Author)

University of North Carolina (UNC) at Chapel Hill - Finance Area ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

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