Do Nonfinancial Firms Use Financial Assets to Take Risk?

Zhiyao CHEN, Ran DUCHIN*

*Corresponding author for this work

Research output: Journal PublicationsJournal Article (refereed)peer-review


Using hand-collected data on financial asset portfolios and exploiting the 2014 oil price crisis as an exogenous cash flow shock, we investigate financial risk-taking at distressed firms. We find that distressed firms, with high debt rollover risk proxied for by short-term liabilities, substantially increase their investments in risky financial assets, including corporate debt, equity, and mortgage-backed securities. The effects are stronger for unhedged firms with low collateral assets. Overall, we provide new evidence that distressed firms take risk using financial assets camouflaged as cash reserves, which, compared to real assets, are less visible and carry lower transaction costs and accelerated payoffs.
Original languageEnglish
JournalReview of Corporate Finance Studies
Publication statusE-pub ahead of print - 30 Nov 2022

Bibliographical note

We thank Andrew Ellul (the editor), an anonymous referee, Philip Bond, Sudipto Dasgupta, Vyacheslav (Slava) Fos, Kristin Hankins, Jarrad Harford, Redouane Elkamhi, and Wenyu Wang, as well as conference and seminar participants at the 2019 University of Oklahoma Energy and Commodities Finance Research Conference, 2020 Western Finance Association Annual Meeting, Case Western, CUHK Business School, Oklahoma Price Business School, and the University of Toronto for valuable comments. We also thank Yi Hu, Cong Li, and Yuxin Luo for excellent research assistance. Zhiyao Chen acknowledges financial support from the General Research Fund by the Hong Kong Research Grants Council [project 14505318].

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