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.
Empirical Evidence on Corporate Risk-Shifting
Article first published online: 4 JUL 2013
© 2013, The Eastern Finance Association
Volume 48, Issue 3, pages 443–460, August 2013
How to Cite
Danielova, A. N., Sarkar, S. and Hong, G. (2013), Empirical Evidence on Corporate Risk-Shifting. Financial Review, 48: 443–460. doi: 10.1111/fire.12010
- Issue published online: 4 JUL 2013
- Article first published online: 4 JUL 2013
- Social Sciences & Humanities Research Council (SSHRC) of Canada
- Arts Research Board of McMaster University
- corporate finance;
- asset substitution;
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.