Empirical Evidence on Corporate Risk-Shifting


  • The authors thank two anonymous reviewers, R. Van Ness (the editor), the discussants at the FMA and SFA meetings, and I. Osobov for very helpful comments and suggestions. A. Danielova and S. Sarkar wish to acknowledge financial support from Social Sciences & Humanities Research Council (SSHRC) of Canada. A. Danielova appreciates funding provided by the Arts Research Board of McMaster University.

Corresponding author: Finance and Business Economics, DeGroote School of Business, McMaster University, 1280 Main Street West, Hamilton, ON L8S 4M4; Phone: (905) 505-9140 x26193; Fax: (905) 521-8995; E-mail: adaniel@mcmaster.ca.


We study empirically whether nonfinancial firms’ behavior is consistent with systematic risk-shifting. We compare firms’ operating risk before and after a debt issue, under the assumption that if there is any risk-shifting it is most likely to occur right after a debt issue. We document a significant increase in firms’ operating risk, even after adjusting for industry influences. The risk-shifting is higher for firms with no subsequent debt issues, and for firms with lower credit ratings. Other determinants are earnings volatility, size of debt issue, and whether the bond is callable.